Don’t kill the goose that lays the golden eggs
3rd April, 2020
As one rent payment quarter date passes (25 March (Lady Day)), tenants and landlords look to the next one on 24 June (Midsummer Day) with their income and costs budgets in mind.
Hopefully, the lock-down will only last for one quarter but its impact will last for the foreseeable future.
‘Don’t put your head in the sand’
Tenants cannot unilaterally decide to pause their lease obligations or withhold rent because they cannot afford to do so. Tenants cannot afford the risk of crying ‘force majeure’ or ‘contract frustration’ to their landlord.
Businesses that cannot meet their obligations become insolvent and can quickly come to an end. Suspension of rent usually occurs when a property is damaged or destroyed (i.e. physically) beyond use, which will is not the case under this Covid-19 episode.
Landlords will need to agree separate cost and timing concessions to their leases with their tenant’s directly.
‘A bird in the hand is worth two in the bush’
The issues caused by the Coronavirus crisis are unprecedented. All landlord and tenant relationships and the whole property rental market are being affected. For Landlords, it’s not as simple as just finding a new tenant (i.e. plenty more fish in the sea).
Empty properties can cause increased business rate and insurance costs for landlords. In addition, the UK Government has placed restrictions on a landlord’s right to forfeit a lease until at least 30 June 2020. Consequently, landlords and their tenants are discussing their obligations and agreeing terms to weather the storm together.
1) Rent holidays & concessions
Parties can discuss and negotiate variations to their lease agreements and payment structures. Both sides need to assess what they can afford and thus offer to the other. It’s important to strike a balance. Landlords are being asked to shoulder short-term costs (losses) in the current downturn. Tenants need to think about and offer future incentives and gains. Lease extensions? Favorable rents later on? Agreeing extra obligations (i.e. repairs)? Or giving up benefits (i.e. services or rented space)?
Changes could be as simple as relaxing payment dates from quarterly to monthly or temporarily suspending additional rent payments such as ‘turnover rent provisions’ (commonly found in retail leases). Large retailers are agreeing ‘rent holidays’ of up to five months. E.g. Carluccios asked for a three month ‘rent holiday’ from their landlords.
What to consider:
- Early and open discussions are important, however, in some situations a solution may not be found. Landlords could be delaying the inevitable.
- Any new terms or changes need to be formally documented in writing. Landlords need to protect and preserve their legal rights/remedies and reduce accidental changes to the lease beyond this crisis period. Tenants need to know what timing and cost concessions have been agreed and how long they will last.
- Landlords need to review their position under any loan/banking facilities and/or their obligations under superior/head leases before renegotiating existing rents and lease obligations.
2) Upcoming rent reviews
Some leases will have upcoming rent review dates and lease termination/break dates. Its standard practice for rent review clauses to be drafted as ‘time is not of the essence’ (this should be checked).
Usually, this flexibility is used to give time to properly obtain and review valuation advice and to negotiate and (in some cases) mediate. Provided that the current passing rent is sufficient, landlords can defer upcoming reviews until after the Covid-19 crisis.
3) Service and insurance charges
In some instances it may be possible for the Landlord to reduce or freeze additional costs (such has service charges or insurance premiums) which are payable under the lease. Most of these costs are passed proportionally to the Tenant. Unfortunately, costs tend to be negotiated and set on an annual basis making it difficult to try and reduce them later on.
Some landlord and tenants may have costs and rent protection within their business interruption insurance?! These will need to be reviewed on a case by case basis.
5) Rent security & guarantees
In some instances landlords will have been provided additional forms of security from their tenants such as guarantees or rent deposits. Landlords can approach guarantors for assistance with rent arrears, costs, expenses and interest.
Rent deposit deeds allow landlords to draw funds to cover the arrears and outstanding payments. There is an obligation on the tenant to ‘top-up’ the withdrawn funds. Some landlords have used the deposit facility to assist tenant’s cash-flow by deferring or waiving the tenant’s obligation to repay the withdrawn funds. The issue with this approach is that it is a short term solution.
Unless the funds are replaced the deposit will run-out. Will the tenant be able to repay them? Now or later?
Landlords and business tenants concerned about their situation should contact their agent and/or solicitor about their options and what practical steps can be taken.
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