‘Variable cost’ rents ‘only way forward’

Owners of commercial properties are being urged to change the way they calculate the rent they charge tenants.

The Queenstown owner of Tourism Property Brokers Ltd Adrian Chisholm described Queenstown as "ground zero" in the tourism slump.

"It went from being a town on steroids to having a cardiac arrest in 72 hours."

As part of the recovery from the Covid-19 lockdown, he believed landlords should begin setting rent as a percentage of a tenant’s turnover.

"It’s clear the only way forward is for rents to be considered a variable cost, not a fixed cost.

"Certainly, that will need to prevail until we get down the track because just like labour, or the cost of goods sold, or anything else, there’s only so much a tenant can pay of the turnover of the business and still exist."

He also described "ratchet clauses", under which leases could go up but not down, as "draconian".

Mr Chisholm said he was an independent operator with 45 years’ experience in tourism, business and property, and had produced a paper soon to be published on LinkedIn because "someone needs to objectively do a helicopter view on where we are at".

It had become clear to him during his involvement in negotiations between landlords and tenants that "everyone’s got their head in the sand in terms of commercial leases".

Under Alert Level 4, businesses with an up-to-date Auckland District Law Society lease would not be paying rent because they did not have access to their premises.

However, when New Zealand moved to Level 3 next Tuesday, there would be a "whole dilemma" where businesses partially reopened with reduced turnover but still with a fixed rent.

"There will be legal arguments flying all over New Zealand.

"The landlord runs the risk, if they play hardball, that the tenant walks out and they’re left with an empty building, no rent, and no operating expenses on the building being paid."

Mr Chisholm said Government money was available to help landlords and tenants come up with more appropriate agreements.

But the Government might also need to consider a mandatory commercial lease code of conduct like the one the Australian Government introduced this month, he said.

He acknowledged some issues could arise from his suggested variable rent programme.

"Sourcing a new tenant under this regime would become more complicated, and most businesses would rather have a fixed rent than face a disincentive to grow their business."

Otago Property Investors Association president Kathryn Seque was concerned tenants would have to "open their books" to landlords under Mr Chisholm’s proposal.

However, it was important for landlords and tenants to work together, she said.

"It would definitely be a model to be looked at."

mark.price@odt.co.nz

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