During the last few weeks numerous landlord clients have sought advice about how to deal with tenants who cannot pay the rent that fell due on the March quarter date because of the current Covid-19 crisis.
Given the unprecedented circumstances, this presents lawyers with a new conundrum and perspective, raising many questions for all concerned.
Landlords and tenants have had to give consideration to – and negotiate – a restructuring of the rents usually payable for the foreseeable (hopefully short term) future in such a way that both parties are protected whilst taking care not to amend or waive the terms of the lease beyond what is necessary.
In theory, landlords can enforce their right to receive rent – and landlords also need to consider cash flow, mortgages and other obligations whilst ensuring that the value of their investment is protected – but in practice, if the business is not open or making any profit and given that forfeiture rights are currently suspended in accordance with the Coronavirus Act 2020, this is not a realistic option. Many landlords have recently approached me for rent concession and deferral side letters, providing an interim solution allowing tenants a period where they may not have to pay any rent and allowing landlords and tenants to share the rental risk. There are several options and strategies in terms of structuring a deferral or concession including:
- Rent reduction for part or all of the term left on the lease
- Rent deferral where the landlord defers part of the tenant’s rent requiring repayment of the deferred rent over the remaining term or other specified period
- Rent abatement perhaps if the tenant is significantly behind on rent payments and the landlord is prepared to forgive a certain amount of the past rent if the tenant remains after COVID-19 restrictions are lifted.
As this becomes more common, I thought useful to set out key terms to consider when documenting rent deferrals and concessions:
- Temporary and no variation – rent relief should be viewed as a temporary concession over a short period of time, for example until COVID-19 restrictions are relaxed or lifted and any agreement should make clear that it is intended to exist as a temporary waiver rather than a variation to the lease. The current restrictions will end and it must be made clear in any agreement that the rent reduction will terminate automatically and revert back to the original rent schedule or be renegotiated by the landlord and tenant at the end of the concession period in order to preserve the long term value of the landlord’s asset. Similarly, if the tenant does not pay the future payments on time after the concession period ends, the original rent should be reinstated with unpaid, accrued rent to be repaid by the tenant so as to give the landlord an immediate remedy under the terms of the agreement before resorting to any remedy available under the original lease.
- Guarantors – if there is a guarantor under the original lease, it would be prudent to require the guarantor to sign the agreement by way of acknowledgement on the part of the guarantor of the agreement’s existence and terms.
- Personal – the agreement should be personal to the parties and cease to apply if either the tenant or the landlord assigns its interest.
- Turnover, stepped or geared rent – consider the structure of the existing rental stream. The terms of any agreement will need to be carefully drafted to take this into account.
- Service charge, insurance rent or any other payments due under the lease – consideration should be given to any corresponding changes to the landlord’s obligations to provide corresponding services under the lease for example.
- Consent – if the lease is an underlease, consider whether any consent to the concession is required from any superior landlord or similarly whether any lender consent is necessary.
- Break option – consider whether there is any break option in the lease that would be capable of exercise while the concession is in place.
- Existing concession – if there is an existing concession arrangement in place then query whether this needs to be terminated first.
- Rent review – the terms of any concession, reduction or deferral should be disregarded upon rent review so that any rent review is calculated in accordance with the provisions of the lease
- Tax implications – any concession may have tax consequences for both landlord and tenant.
- Insurance – landlords and tenant should check any rent suspension triggers and insured risks provided for in the lease and business interruption insurance to see if the current situation is covered.
- Waiver of other tenant covenants – consider whether other covenants in the lease should be waived during the concession period, for example the user clause, signage restrictions or keep open covenants which will be particularly relevant to retail, hospitality and leisure tenants.
- Interest – query whether the interest provisions in the agreement prevail over those in the original lease.
- Termination and Penalty – consider the mechanics of how the agreement will end. The case of Vivienne Westwood Limited v Conduit Street Developments Limited highlighted the need to avoid termination provisions allowing the landlord to terminate the agreement if the tenant breaches its terms or those of the lease which were found to operate as a penalty.
- Confidentiality – whilst potentially difficult to enforce and prove any breach, the parties may wish to prohibit one or both from publicising the agreement for commercial reasons.
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Disclaimer: this BLOG has been written to give general guidance on key issues on tenant’s leases but does not constitute legal advice and cannot be relied on.