Commercial landlords and tenants need to realise they are joined at the hip and may need to start setting rents as a percentage of the tenant's turnover

Commercial landlords may need to adopt new ways of calculating rents for their properties in the post-lockdown world, according to an expert in the hard-hit hospitality sector.

Adrian Chisholm, a director of Tourism Property Brokers, which specialises in the sale and leasing of tourism and hospitality-related  businesses and properties, says both landlords and tenants may need to start thinking of rent as a variable cost, based on the tenant's turnover, rather than a fixed cost.

At present, most commercial leases charge a fixed amount of rent each year, with clauses that allow the rent to be increased or adjusted at set intervals.

Some tenants will simply not survive in the post-lockdown era if their rent remains at pre-lockdown levels, because their turnover will have reduced so much.

Chisholm says the first thing that both landlords and tenants need to do is work out whether the tenant's business is facing a short term cash flow issue or a long term viability issue.

If it is a short term cash flow issue, where the tenant suffers a reduction of turnover during the lockdown and for a period afterwards, after which revenue begins to climb back towards normal levels, it may be possible to solve the problem with rent deferrals, where the landlord reduces or abates rent in the short term on the basis it will be repaid further down the track when business picks up.

But some tenants may be facing a situation where their revenue could be substantially reduced long term, making their business unviable if their rent is kept at pre-lockdown levels.

This problem is compounded by the fact that many if not most businesses probably won't know how much their revenue will have dropped to once the lockdown ends, and how quickly it may pick up.

Chisholm says in such situations an interim solution could be for landlords to adopt a variable rent regime based based on their tenants' turnover.

Each month a tenant's turnover could be compared to their turnover pre-lockdown or their average over the previous year.

That percentage could then be applied to their monthly rent.

The percentage of turnover figure could be confirmed by an accountant each month.

This would inevitably mean a reduction in rent which could be quite severe, immediately after the lockdown.

But it would also allow the rent to rise as the fortunes of the tenant's business improved.

The alternative for the landlord may be to lose a tenant.

"Some rent is better than none and it is important to preserve a good tenant," Chisholm said.

"A vacant building will still incur outgoings and will require incentives in this new market to attract a new tenant.

"Tenant demand will be limited to those willing to undertake a new fitout in an environment where leasehold lending facilities will be hard to secure.

"The parties need to accept they are joined at the hip," he said.

Chisholm said he saw a move to variable rents as a stopgap measure, until the market settled to a new level in the post-lockdown world.

"But that could be two years," he said.

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