Due to the electric pace of change, it is important to caveat that this guidance is likely to, very quickly, become outdated. As with all matters, there is no 'one size fits all' and our Corporate and Commercial Teams are on hand to provide specific bespoke advice.
Commercial Tenants – Should I pay my rent?
The current guidance does not suggest that commercial tenants should suddenly stop paying their rent. In fact the government guidance so far suggests that where a tenant can meet their rent obligations then they should continue to do so and pay rent in accordance with their lease. The government has also outlined a package of support to help tenants and businesses during this difficult period.
Despite the government package of support there are many commercial tenants including charities who may still be concerned regarding their ability to meet their rental obligations as a result of Covid-19 and early communication between landlord and tenants is recommended and should be encouraged. Where a tenant cannot afford to pay their rent, it may be possible for the landlord and tenant to come to an agreement regarding a concession in respect of the rent and potentially other obligations in their lease.
What are the main considerations for a landlord and tenant when negotiating concessions to rent?
There will be a number of factors for the parties to discuss when considering what rental concessions can and should be agreed, these include (but are not limited to):
- Deferment of rent – A landlord may be willing to agree a deferment of rent. There is no statutory requirement to agree a specific period for any rental deferments, however it has been reported that 3 months deferment of rent is being commonly requested in line with the Government's current protectionary period against eviction of commercial tenants for non-payment of rent. Where rent is deferred it is important to agree to a repayment plan, consider whether any interest will be due and for both parties to stick to the agreement.
- Does any deferment of rent include other sums payable under the lease – It is likely that a tenant may also have difficulties in payment of additional costs in connection with their lease such as service charges and other sums due. These other sums may be considered rent by reason of the definition given to "rent" under the Coronavirus Act 2020. Under the 2020 Act, rent is defined as; "includes any sum a tenant is liable to pay under a relevant business tenancy" so the terms of each lease would need to be considered. If, for example, insurance rent or service charge were included as rent under the terms of a lease, the landlord could not then forfeit for non-payment of those sums either
Where a service charge is a fixed amount, the amount of the concession maybe reasonably straightforward to agree however where a service charge is payable in advance on account with balancing payments then matters can become more complex and further consideration and discussion is likely to be needed to come to a mutual agreement.
- Frequency of rent and cashflow considerations - Many commercial leases require the payment of rent quarterly but it may assist a tenant if the rent payments could be amended to monthly or even weekly payments.
- Superior landlords consent – If the tenant is an undertenant then the landlord will need to check the provisions of the Headlease as it is likely that the superior landlords consent is required to any concessions agreed.
- Legal charges/mortgages – If the lease or the landlords title is subject to a legal charge then it is likely that the lender's consent will also be required to any concessions agreed.
- Other source of funds – For example, if the landlord has the benefit of a rent deposit deed, the landlord and tenant may discuss using the funds secured by the deed as an interim measure. The landlord could use the rent deposit as an immediate source of funds to alleviate the impact of Covid-19 on their own financial circumstances and then agree with the tenant to defer the 'top-up' provisions in the rent deposit to its full amount once they are in a position to do so.
From a landlords perspective while on the face of it any reduction or deferment in rent and or service charge is not going to be favourable, there may be other long term benefits of agreeing such concessions. A landlord for example may seek to agree with the tenant to look to delay any rent review which is due during the Covid-19 period as a rent review during this time may produce a supressed rent. In addition co-operation between landlord and tenant could benefit both parties, improving and/or strengthening relationships through continued and open dialogue as both parties try to navigate through these difficult times.
How should a rent concession or other concessions agreed between the landlord and tenant be recorded?
Landlords and tenants should ideally ensure that any concession regarding the payment, deferment of rent or indeed any other concession is recorded in writing.
There are a number of ways in which concessions could be recorded, these include a formal Deed of Variation which can be registered at the Land Registry or by a Side Letter depending on a number of factors including but not limited to; the nature of the concession(s) agreed to, the duration of the concession(s), whether the concession is personal to the tenant etc..
A side letter does not have to comply with the formalities of a deed and such is likely to be more flexible and less costly for the parties particularly in terms of legal fees and will not need to be registered at the Land Registry. The disadvantage of a side letter is that because it does not have to satisfy the requirements of a deed, there can sometimes be questions of enforceability.
The parties will need to discuss how long any concession agreed is to apply for and whether any concession is to be personal to the current landlord and tenant or will apply to successors in title.
A repayment plan setting out the detail of any concession which has been agreed should be recorded and adhered to by both parties, setting out when the concession commences and how long the concession period is to last for and details of what happens in the event of non-payment of the deferred rent. For example if a deferred payment is missed, will this trigger repayment of the outstanding balance earlier.
Protection from eviction for commercial tenants
Under the Coronavirus Act 2020, commercial tenants who cannot pay their rent because of Covid-19 will be protected from eviction. The government guidance suggests no business will automatically forfeit their lease and be forced out of their premises if they miss a rent payment up until 30 June and there is the option for the government to extend this period if needed.
It is important however that commercial tenants understand that this is not a rental holiday. All commercial tenants will still be liable for the rent payable during the protectionary period. Commercial tenants are protected from eviction if they are unable to pay rent whilst the government's protectionary period is running, however once the protectionary period has ended a landlord's remedies for non-payment of rent will again be "live" .
While landlords are not currently required to agree any concessions in a commercial lease, we are seeing it reported that some landlords are nevertheless agreeing a deferment of rental payments.
Landlords, tenants and mortgage lenders are encouraged to communicate with each other and to try and come to a mutual agreement regarding any concessions that may be necessary. This is likely to be beneficial for all parties rather than taking an enforcement based approached.
Finally...
It is important to keep up to date with the latest government advice and guidance as this is evolving daily. Click here for the latest government guidance on COVID-19.
The government's Business Support Website also contains some useful frequently asked questions and answers and signposting for additional advice and support including various financial packages that businesses may be eligible to apply for.
To find out more or discuss your individual requirements in further detail, our dedicated solicitors for both commercial landlords and tenants will be delighted to help. Contact us today on
*This article is provided for general information purposes only and does not constitute legal advice or other professional advice.
