Introduction 

Like the rest of Australia, the team at LPC is saddened by the effects of the floods in Victoria. We hope everyone remains safe and wish all businesses a speedy recovery. With many businesses still unable to access their premises, tenants will be contemplating how they will get their businesses back up and running. What many tenants do not realise is that there are clauses in standard lease documents that allow for abatement of rent if their premises are damaged. LPC has been working with tenants in providing a commercial review of their lease documents to ensure that if there is an opportunity to abate rent or for the landlord to repair the damage, tenants take up that opportunity to limit their occupancy costs.

Damage Clause 

A quick snapshot, from a commercial perspective, of a ‘damage’ clause, provides provisions in the lease as to which party is responsible for repairing damage to the building which has not been caused by the tenant. In the case of many businesses in Victoria, the most recent example is by flood. Whilst we note that leases vary, the standard provision is that the landlord must notify the tenant whether they intend to repair the damage to the building. In the case of only a section of the building being affected by ‘damage’, the tenant’s rental payments will reduce to the proportionate loss of amenity caused by the damage. What we have advised is that Tenants closely check their lease provisions in order to secure rental abatement during this difficult time.

Utilisation  

Whilst clauses such as the damage clause can provide relief in the short term, LPC has been advocating for more encompassing Utilisation clauses to be inserted into lease arrangements to make them more tenant-friendly. LPC has always advocated for tenants to ‘think of a lease as buying utility of a leased asset with the property owner’s warranty relating to the promised utility.’ Meaning that tenants need to consider their leased premises as a service from the landlord, and if that service cannot be provided, either from damage, a pandemic, or government mandate, then payments for that service should either stop or abate.

At LPC we help to mitigate the risk of diminished utilisation in different ways, including negotiating property owner guarantees pertaining to the attributes that made the premises the preferred choice.  The ‘end in mind is that the tenant gets what was promised without interruption, supported by appropriate provisions that protect the tenant should utilisation be impaired for reasons beyond the tenant’s control.  Whilst the pandemic was dramatic in its impact on utilisation, there are many other more subtle factors that negatively impact the tenant’s utility value over the term.  These include a downgrade to building status (or shopping centre performance for a retailer), drop off in the building services regime, change to the tenancy mix such that utility value is negatively impacted, reduction in the appeal of the common amenities, landlord and/or redevelopment works that impact the utility, drop off in foot traffic (key factor for retail), and a great many other identifiable risks that the tenant does not control and that impact utility value.

Conclusion

For further information on how to apply your damage clause or to seek a better understanding of how LPC are incorporating utilisation into their client’s lease negotiations, please reach out to our team for further information on 1300 415 215 or [email protected]