Commercial Property: Rent Concessions for Landlords & Tenants Facing COVID-19

April 28, 2020

 

In response to the Coronavirus outbreak, the UK Government has temporarily prohibited landlords from forfeiting leases for non-payment of rent. However, during these difficult and unprecedented times, many tenants will be asking their landlords for rent concessions to help alleviate financial pressure.

Where landlords agree rent concessions with tenants, it is crucial that any such agreements are carefully considered and documented. This will help to ensure that all grounds are covered and to avoid disputes later down the line.

Catherine Burke explores some issues to be considered before entering into an agreement:

1. How will the rent concession be documented?

This can either be done by way of side letter or via a deed of variation. A side letter is a temporary arrangement and will not permanently alter the terms of the lease, whereas a deed of variation will permanently vary the lease terms.

Thought should be given to whether the rent concession is to be personal to the current tenant or whether the benefit will pass to any future tenant in title in the event that the lease is assigned. In most circumstances, a landlord will not want the benefit to pass to a successor and therefore the most appropriate option would be to use a side letter.

If a side letter is used then the tenant will want to ensure that the landlord receives some kind of benefit by way of the agreement, otherwise there is a risk that the agreement could be unenforceable.

2. What form of rent concession is being agreed to?

There are many forms of rent concessions available to landlords and tenants. Two of the most common being ‘rent deferrals’ and ‘rent holidays.’

A rent deferral is typically where a landlord agrees not to enforce payment of rent for a specified period. However, rent still remains payable during this period and can be recovered once the agreed period comes to an end.

A rent holiday is typically a rent-free period or an agreement to accept a lower rent for a specified period.

3. Is there a guarantor?

If there is a guarantor under the lease, then the guarantor should be a party to any concession agreement. An agreement between a landlord and tenant to amend the terms of the lease, which is entered into without the consent of the guarantor could have the unwanted effect of releasing the guarantor from its obligations under the guarantee.

4. What if the parties agree that the landlord will deduct rent payments from a rent deposit?

If a rent deposit is in place, a landlord may agree to deduct some or all rental payments due from the tenant from the rent deposit. In this scenario, parties should agree whether the usual top-up provisions in the rent deposit deed will apply, or whether a longer repayment period will be afforded to the tenant.

5. What if the landlord agrees to grant the tenant a rent-free period?

A landlord may agree to a rent-free period and then extend the term of the lease for that same period. However, this can have unintended consequences for both landlords and tenants:

Potential consequences for tenants

From the tenant’s point of view, this could lead to issues with:

  • Land Transaction Tax/Stamp Duty Land Tax

  • Registration issues at HM Land registry

Potential consequences for landlords

  • The contracts relating to repair and decoration in the new lease will be newly determined by the state of the property at the date the new lease is granted. This is particularly something to consider if there are any existing dilapidations at the property.

  • The tenant may inadvertently be granted a new lease with security of tenure where the old lease was contracted out.

  • If there was a rent deposit under the old lease then this would fall away and the tenant would be entitled to that money back. Similarly, any guarantor under the old lease would be released from its obligations under the guarantee.

6. Issues relating to a landlord’s right to forfeit

If a landlord wishes to retain the right to terminate a lease early for breach of covenant/non-payment of rent, then this should be specifically noted in the concession agreement.

These are just some of the issues that landlords and tenants will need to consider when agreeing rent concessions. Parties discussing rent concessions should seek legal advice before entering into any agreements.

If you require any advice or guidance on the above please get in touch:

 


Catherine Burke

 

 

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