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Franchising: Chilling Winds of Change

Andrew Grima

We are in the middle of winter - depending on where you live in Australia it can be a miserable time weather-wise, with cold and damp evenings and chilly winds. Unfortunately, the past few months have heightened the feeling of winter as we continue to see the chills of economic dislocation impact on the business community through events largely out of our control. If you are working in the franchising industry, you are likely to be facing particularly difficult times. 

As a practitioner representing tenants in various sectors of the economy including the retail and franchising sector, I am seeing the impacts of the current environment first-hand. Specifically, I am seeing a number of tenants who are struggling to honour their leasing obligations. I want to share my observations as to what I am witnessing and what you can do as a tenant. 

Relief? 

As many of you would be aware, and which I have discussed in previous articles in the Coleman Greig COVID-19 blog and during webinars, the Federal Government introduced a code of conduct and there has been corresponding state and territories passed regulations and legislation, in an attempt to assist landlords and tenants to negotiate appropriate rent relief packages in good faith. 

Sadly, I am seeing very little joy being experienced by either parties as the framework is extremely broad and there are not many definite rules by which the parties are forced to come to an arrangement. In particular, it is not clear as to the duration of a rent relief package that a tenant is entitled to, how much rent relief they can be entitled to and what information a tenant must supply to a landlord. So, unfortunately in many of the matters I am working on, parties have spent a lot of time to date merely negotiating what information they need to provide before they even reach a deal on the extent of the rent relief.

The only matters that a landlord and tenant can be sure of are that:

1. The landlord cannot terminate a tenancy that is captured by the regulations is in breach of lease for non-payment of rent or in relation to trading hours.

2. The landlord cannot call on a bank guarantee, personal guarantee or sue the tenant for the breaches referred to in point 1.

3. The tenant is not excused from any breaches of their lease, occurring prior to COVID-19.

4. The tenant is entitled to at least 50% of any rental relief in the form of a waiver of rent.

In my view if you are faced with the need to negotiate within the context of the above framework, the name of the game is to try and be reasonable and look beyond the initial crisis for the longer-term relationships – if this is possible! You need to think about what life will look like once any period of relief is over and the landlord has the ability to then exercise their normal rights under a lease. 

Moving forward

As the months go on and if the current legislative regime is not extended in relation to relief for tenants, then you will need to consider what your position is under your lease should the landlord attempt to pursue you for any rental arrears.  In my view, the name of the game is to attempt to renegotiate a rental regime that is more reflective of the times ahead, for example a rental payment that is geared more around turnover than a fixed rent might be appropriate. Your landlord might not be willing to agree to this, but it is still worth asking for. The sobering news is that unfortunately, if you have signed a lease, you are bound by its terms and unless the Federal Government steps in and permanently changes the rules and the landscape, there will be a point of reckoning for parties to a lease. Accordingly, you really need to seek the advice of your accountant and consider ways to restructure your affairs in order to move forward and to really consider your future leasing obligations. 

My future job prospects

There are many people at the moment who will be facing the horrible prospect of redundancy. In my lifetime, I have lived through several economic downturns and I have noticed that each time, people try to solve their job situation by buying a franchise. Whilst I am not here to discourage this, nor consider the merits or lack thereof of doing this course of action, I would caution parties to really look carefully into the fine print.  Before doing so, you need to get advice from experts in relation to entering into a franchise agreement and the ancillary arrangements such as your lease. 

As I have highlighted above, once you sign your lease you are locked in, and given the current parlous state of the economy, you need to really consider carefully the terms upon which you would negotiate and enter into any lease arrangement. For the brave, there may be some really good commercial opportunities and you really need to think about the terms and conditions of your lease more than ever before.

Whether you are a tenant or a landlord and require assistance, please do not hesitate to contact a member of Coleman Greig’s Commercial Property team, who would be more than happy to assist you today.