Struggling to Pay Rent on Your Commercial Lease? Here’s What You Can Do
If you’re finding it hard to pay rent on your commercial lease, you’re not alone. Many small businesses face this challenge, and while it can feel overwhelming, there are steps you can take to address the situation. Help is also available to guide you through this process.
Understanding Your Responsibilities
It’s important to know that no government in Australia provides direct financial assistance to pay overdue rent for businesses. Each business is responsible for meeting its own financial obligations, including rent.
However, governments do offer free services that can provide guidance and information about your options. These services can help you navigate your situation and make informed decisions.
As a business owner or company director, you have legal obligations to:
- Meet your financial commitments, including paying rent and outgoings.
- Ensure your business is trading solvently (able to pay its debts as they fall due).
- Honour the terms of your lease agreement with your landlord.
What Are Some Options If I Am Struggling to Pay My Commercial Premises Rent?
If you’re unable to meet your rent payments, it’s crucial to come up with a series of steps you will take to try to improve your financial situation, make your payments, and meet your obligations. If those steps don’t work – you may need to consider trying to sell the business, closing the business, or putting the business into administration or liquidation.
1. Access Free or Low-Cost Support Services
There are several resources available to help you navigate these options and either turn your business around or close it down:
- Small Business Debt Helpline: Call 1800 413 828 for free, confidential financial counselling.
- Mentoring for Growth Program: Register for free mentoring support from experienced business professionals.
- Small Business Financial Counselling Service: Access free financial counselling designed to support small businesses in financial difficulty.
- Cash Flow Management Resources: Access tools and guides to help you manage your cash flow effectively.
- Bank Financial Hardship Teams: Contact your banks financial hardship team to discuss options.
- Restructuring Resources: Read our article, Restructuring: A Lifeline for Small Business in Financial Crisis, for more information.
- Legal Advice: Seek legal advice to understand your rights and obligations. There are ways to minimise costs, including accessing free (pro bono) legal services.
The Australian Securities & Investments Commission (ASIC) has information on what to do if you suspect your company is in financial difficulty and suggests:
“get professional accounting and/or legal advice as early as possible. This increases the likelihood the company will survive. Do not take a ‘head in the sand’ attitude, hoping that things will improve – they rarely do.”
2. Explore Other Financial Solutions
In addition to negotiating with your lessor, you might consider:
- Negotiating with creditors: Speak with banks, utility providers, or the ATO to discuss payment plans or other arrangements. Financial counsellors or turnaround specialists can assist with these conversations.
- Borrowing money: Accessing additional funds could help you through a temporary downturn but will come with costs.
- Chasing unpaid invoices: Read our article on recovering outstanding payments for tips that could help you meet your obligations.
- Selling the business: Selling a business that is struggling to pay rent can be challenging, but it may be an option to explore.
- Assigning the lease: Transferring your lease to another party could be a solution, but this usually requires the lessor’s consent (we explain more in our article about the changes under Queensland’s New Property Law Act.
- Negotiating a lease surrender: Read our article: Ending a Lease Early – What’s in it for either party?
- Winding up the business: If continuing to trade is no longer viable, you may need to consider closing the business. Be aware that this could leave you without assets, the lessor with unpaid rent and any guarantor personally liable, if there is one.
3. Request a Deferral, Payment Plan or Incentive from Your Lessor
You could approach your lessor and request a temporary measure such as deferring payments until later, a payment plan or an incentive, (reduced or no rent for a period), while you work on improving your business’s financial position. To strengthen your case:
- Engage in mentoring, financial counselling, or other support services to demonstrate your commitment to resolving the situation.
- Expect to be asked to reveal your figures – transparency can often build trust, but also comes with risks.
- Prepare a written proposal outlining your plan and how the deferral, payment plan or incentive will help.
- Seek legal advice to ensure your proposal doesn’t unintentionally breach your lease or risk termination.
Incentives, such as rent-free periods or fit out contributions, are more commonly offered at the start of a lease. These are used to attract tenants and encourage them to commit to a long-term lease.
However, the concept of an “incentive” is about providing something in exchange for a benefit (long-term lease for short term rent relief). If you can present a compelling case that demonstrates your commitment to resolving your financial difficulties, you may be able to negotiate some type of rent reduction, deferral or payment plan with your lessor.
It’s important to understand that rent reductions partway through a lease are generally unlikely, especially if the reason is simply that you’re struggling to pay rent. Most lessors will rely on the legally binding contract you signed (the terms of the lease) to enforce payment and follow the processes outlined in the contract to recover what you owe.
A lessor is not obliged to provide a change in rent at a tenant’s request and the chances of negotiating a pathway forward can depend significantly on:
- the cause of the financial hardship (is the cause a one-off disturbance or is the business unsustainable)
- the way the first request is made (demands rarely work, negotiation might work more often)
- the way the ongoing negotiation is approached by the tenant
- relationship history
- the degree of transparency by the tenant
- what the alternatives are for the lessor.
The value of a commercial property is often tied to the face rent specified in the lease. For this reason, lessors are generally reluctant to reduce rent during the lease term, as it can impact the property’s overall value; however, incentives (that don’t impact face rent) applied in the short term to help a tenant recover from a significant event can make commercial sense, especially if the tenant demonstrates a commitment to solve their problems and seek help to return to profitability.
Rent abatement refers to a situation where the lessor waives or reduces the face rent for a specific period. This is typically only required by law or under the lease if the premises becomes unusable—for example, due to damage or other issues (see our article Asking for Rent Relief if Commercial Property is Damaged or Unusable for more details).
Always document all conversations and agreements in writing. Altering the agreement (the lease) or drawing up a variation may come with legal costs and it is important to consider ways to minimise these, but if they are unavoidable – negotiate who will pay for the costs involved.
The Risks of Skipping Rent Payments
When rent is one of the largest expenses in your business, it can be tempting to delay or skip payments, hoping to catch up later. You might even assume that your lessor or property agent will understand your financial struggles and show leniency.
Remember – a lease is a contractual agreement, not a personal relationship. Unless you are renting from friends or family, your lessor is likely to prioritise enforcing the commercial terms of the lease. Like your customers who you expect to pay you, the landlord expects to be paid as per the agreement. Even in cases where the lessor is someone you know personally, they may still rely on your rent payments to meet their own financial obligations. Find out more by reading our factsheet Not Paying Rent
If you fail to meet your rental obligations, you risk receiving a breach notice for breaching the lease agreement. This could lead to serious legal consequences, including:
- Legal action: The lessor could pursue you for unpaid rent and other associated costs, which may result in additional financial strain.
- Eviction: Your lessor may take steps to terminate the lease and regain possession of the property, leaving you locked out.
Rather than skipping rent payments, it’s crucial to take proactive steps to address the situation. Seek professional legal advice and explore the support services available to small businesses.
What If I Am in Dispute with the Lessor? Can I Withhold Rent or Outgoings?
Withholding rent or outgoings in breach of your lease is unlikely to resolve the dispute. In fact, it often escalates the situation and may result in the lessor issuing you a notice to remedy the breach, which is typically the first step towards terminating the lease.
If you’re in a dispute with your lessor, it’s important to approach the situation professionally and understand your rights and obligations under the lease. If your dispute relates to the lessor’s obligations under the lease (e.g., repairs or maintenance or incorrectly applied rent increases), consider the following steps:
- Start with a conversation: Talking the issue through is a chance for both of you to learn about both perspectives. Attempt to resolve the issue through open communication and negotiation to avoid escalating legal action.
- Apply for mediation: The Queensland Small Business Commissioner (QSBC) offers mediation (structured negotiations) to help resolve disputes.
Issuing the Lessor a Breach Notice
Alternatively, you could seek legal advice about serving the lessor with a notice to remedy their breach of the lease. This notice could outline the lessor’s failure to meet their obligations and indicate that, if the breach isn’t resolved within a reasonable timeframe, you may take further action (e.g., withholding part or all of the rent or outgoings).
If you’re considering issuing a breach notice or withholding rent or outgoings, it’s critical to proceed with caution:
- Follow the legal process and comply with the terms of your lease.
- Provide proper notice to the lessor, recognising that if a court or tribunal found you relied on a defective notice or you issued it incorrectly, you may be found liable for damages.
- Avoid breaching the lease yourself by acting unlawfully or without due process.
We strongly recommend seeking legal advice before taking any action to ensure you fully understand your rights and responsibilities.
Applying for Mediation
The QSBC offers mediation services to help resolve disputes between tenants and lessors. However, it’s important to note that the QSBC’s jurisdiction does not extend to mediating disputes about the amount of rent or outgoings payable under the lease (as per section 97 of the Retail Shop Leases Act 1994).
However, if your dispute relates to another matter under the lease (for example repairs or maintenance), and you propose solutions such as a rent reduction, rent waiver, or rent incentives as part of the resolution, mediation may still be an option.
To apply for mediation, you can use the QSBC’s online form apply for mediation.
To discuss your situation, and get connected with people that can help, reach out to our Assistance team.
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