"How did you go bankrupt? Two ways. Gradually, then suddenly.” - Ernest Hemmingway
CreditorWatch's Business Risk Index reported a 57% increase in insolvencies in the year leading up to November 2024, with failure rates across all sectors projected to reach 5.6% in 2025. These statistics underscore the escalating financial pressures Australian businesses face, leading to a notable increase in insolvency cases as we progress into 2025. These statistics reinforce that Australian businesses need to give more attention to risk mitigation relating to potential insolvency. Restructuring lease arrangements is a risk mitigation strategy aimed at minimising long-term risk. It is also a strategy that does not get the attention it should.
Why business insolvencies in Australia are increasing in 2025
"The worst bankruptcy in the world is the person who has lost enthusiasm." - William Howard Arnold
Several factors are contributing to the surge in insolvency cases through 2024 and into 2025. These include the impacts of economic uncertainty, post-pandemic adjustment, tighter regulatory requirements, and rising operating costs.
Economic uncertainties continue with rising interest rates, inflationary pressures, imported price increases, and fluctuating consumer demand, adding to the 2025 challenges facing businesses. At the same time, the safety net measures implemented by governments to help businesses navigate the pandemic have ended, exposing underlying vulnerabilities in many businesses. The combined impact of these factors has seen operating costs increase at a level that cannot be recovered by passing price adjustments on to customers, thereby impairing operating cash flow and increasing business risk. The external response to these factors has been to tighten the regulatory framework with more onerous reporting and compliance obligations to protect lenders and other stakeholders. The collective effect of these factors is a significant increase in business stress, as evidenced by the marked increase in insolvencies.
Whilst the news regularly reports on the increase in business insolvencies, less is said about what measures businesses could have taken to mitigate the insolvency risk. One measure would have been for management to give more attention to derisking their commercial lease arrangements to provide more assistance in tough times. Indeed, the burden of irrevocable and ever-increasing occupancy costs is a long-term commitment that offers no respite to the occupier when the circumstances in which the agreement was made are radically changed.
The call for lease norms to be updated
"Nothing was more up to date when it was built or is more obsolete today than the railroad station." - Ada Louise Huxtable
Sydney residents enjoy the new Metro line, which makes commuting more affordable and less time-consuming for many. One of the striking observations for commuters is how different the stations are in design and functionality and how much more suited they are to commuters' needs in 2025 and beyond. We can't say the same for commercial lease arrangements, which have resisted change despite businesses needing to be more responsive to ever-shortening business cycles and significant shifts in external factors.
The ability of a business to adapt and adjust is increasingly critical if a business is to survive and thrive, yet long-standing lease norms are inflexible and limit the lessee's ability to adjust to changing accommodation requirements. Whilst it is both reasonable and logical for landlords to protect passive, risk-free, and escalating income, it is also a fact that outdated lease norms are becoming increasingly disconnected from the growing need for a business to adapt and that this inflexibility is negatively impacting the tenant's ability to survive and thrive and is a contributing factor to the rise in business insolvencies.
The pandemic highlighted this problem as leases with outdated lease norms did not protect businesses whose utility of the leased premises had been impaired, increasing the number of insolvencies as lenders called on bank and personal guarantees. Imagine a mobile phone contract holder with a fixed monthly fee who is unable to use the service for six months due to an external change but still pays the monthly fee or a user of a leased vehicle who is unable to use the vehicle because the vehicle manufacturer has recalled the vehicle for rectification works but still pays an uninterrupted lease obligation or a coworking subscriber who finds they are often unable to secure a hot-desk but continues to pay the full subscription. Each of these situations is almost unthinkable as utilisation is impaired through no fault of the user (and often through no fault of the provider), and contractual norms have developed with recompense and other rights that come into play when utility is impaired. In these situations, the norm is that the provider bears the risk of impaired use, with appropriate protections for the user. Not so with commercial tenancy arrangements, as lease norms transfer the risks of ownership to the tenant, together with inflexible and escalating occupancy costs, whilst the landlord retains the benefits of ownership. The pandemic has evidenced how important and how overdue it is for a commercial lease to be regarded as the right to utilise leased premises together with landlord guarantees concerning utilisation, with clearly stated utilisation protections and actionable recompense and lessee rights when utilisation is impaired for any reason outside the lessee's control.
Change will not come easy
"If you change the way you look at things, the things you look at change." - Dr Wayne Dwyer
A helpful starting point to drive change in commercial leasing norms is for all commercial tenants to consider a lease as a right to utilise a premises together with landlord guarantees concerning the utilisation. This focus on what we at LPC call 'utility value' will give rise to lease negotiations that drive new commercial lease models that align the interests of landlord and tenant in a way that promotes tenant enterprise and entrepreneurial effort. Much is said and written about labour productivity, but very little attention is given to lease productivity, which can restrict or promote tenant enterprise. More productive lease arrangements enable more businesses to survive and thrive in changing circumstances. At the end of the day, this will benefit both tenants and landlords. The challenge is for commercial tenants to call for change collectively.
Who is LPC, and how can we help futureproof your accommodation arrangements?
LPC is a conflict-free advisor to commercial tenants across Australia and New Zealand. We facilitate strategic review of accommodation strategies, represent occupiers to secure best-fit accommodation arrangements, provide lease management services to multi-site occupiers, and oversee client fit-out and relocation. Contact us for help with your accommodation strategy review.
