2020 has been a challenging year for all and there have been various changes brought in by the Government to try and manage the economic effect of Covid-19 on businesses. With regards to commercial leases in particular, the Government has introduced legislation which restricts landlords’ options when a tenant fails to pay the sums due under the lease.
As it currently stands, the restrictions laid down by the Coronavirus Act 2020 prevent landlords from forfeiting a lease due to non-payment of rent or other sums due under the lease. This has been extended to apply up until 31st March 2021.
So if a tenant is struggling to keep up with payments in light of the pandemic then what options do landlords have available? Whilst this should not be decided lightly, one option is to consider a form of rent concession with the tenant.
Rent concession with the tenant
In deciding whether to agree to a concession, landlords should ask their tenants for evidence as to how Covid-19 has financially impacted them and consider the long term implications of entering into this form of agreement. Whilst there is no obligation on the landlord to agree to a rent concession given the current climate and the fact that the usual remedies available to landlords have been temporarily restricted, it may be worth considering.
For example it may be that the tenant is still able to pay the cost of the service charge and/or make some form of contribution towards the annual rent, meaning that the landlord still receives some income rather than having an empty unit whilst trying to re-let the space in an uncertain market.
If both parties wish to enter into this sort of agreement, there are various types of rent concession that can be agreed and these include:
- Monthly payments – if the lease provides that the tenant is to pay the rent and/or service charge on the usual quarter days, you can agree to change this to monthly payments to assist the tenant with their cash flow.
- Deferred payments – this is where the tenant does not pay the rent for a period of time but instead this sum will be repaid by way of additional rent later on and it may be that a payment plan is agreed.
- Deduction in rent – this is where you can agree with the tenant that the rent will be reduced for a certain period of time.
- Rent free period – here the tenant would not have to pay any rent now or in the future when this period ends.
Depending on what type of rent concession is agreed, there are several points which landlords must to consider and bear in mind when it comes to documenting the agreement
- How long will this last for and how will the agreement come to an end?
- What does it apply to? Is it just the annual rent or will it also include the service charge and any insurance rent as well?
- Will interest be payable and if so when will it fall due?
- Will this be personal to the tenant only (which is advisable) or will it also apply to any successor tenant?
- What other clauses might be affected by this agreement? You should consider any upcoming rent reviews or break clauses, for example.
- What consent is needed, if any? Is there a superior landlord, a mortgagee or a guarantor?
- Is this to be a permanent or a temporary change to the lease?
If you agree a rent concession with the tenant, you should ensure that the agreement is properly documented. This can be either by a deed of variation (if the changes to the lease are to be permanent) or by way of a side letter (if the changes are to be temporary only).
If you have any questions or wish to speak to a member of the team then please do not hesitate to contact us
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of advice, recommendation or opinion. DPM Legal Services Limited accepts no liability for any loss or damage, howsoever caused, as a result of any reliance on any information provided.