Covid-19: Rent concessions

In current times many tenants are finding themselves in financial trouble and will be looking at ways to keep their business afloat. Rent and other lease costs will be one of the reductions they will be looking to make to reduce their outgoings.

Neither party to a lease can unilaterally amend the terms of their lease, and so the landlord and the tenant would need to agree between them what concessions are to be made. Therefore for a tenant in trouble, it is worth opening up the channels of communication as soon as they can.

A rent concession, such as a reduced annual rent or a change in terms from payment quarterly to monthly, would be best documented by way of a side letter. A side letter is appropriate if there are to be temporary amendments made. If the amendments are intended to be permanent and not just a concession in current times then a deed of variation may be a better option.

In agreeing the terms of the side letter, the following points need to be considered and discussed by both parties:

  1. A landlord is likely to ask for evidence of financial hardship, and so a tenant should be prepared for that request to be made.
  2. You will need to consider if the concession is to be personal to the current tenant. It is unlikely that the landlord will agree that the concession would also benefit a new tenant if the current tenant were to assign the lease.
  3. If the tenant has a guarantor then the guarantor should also be a party to the side letter, as this confirms that they are aware of and acknowledge the amended terms. This provides certainty as otherwise the guarantor could be released from the lease by mistake, which would be to the landlord’s detriment.
  4. If the landlord has a lender, you may need consent from the lender to this arrangement.
  5. If the landlord has a superior landlord, you might need their consent also.
  6. You need to agree at the outset how the side letter will be terminated for certainty. Termination on notice would be best.
  7. Is there an upcoming rent review? If so, this needs to be considered between the parties.
  8. The side letter should be fair in the consequences of termination. If consequences are heavily weighted against the tenant then those consequences may not be enforceable as they will be deemed to be a penalty.

Should there still subsequently be issues with payment of rent, forfeiture is not necessarily an option in the near future. Under the Coronavirus Act 2020 commercial tenants are protected from eviction during this time. It is important to note however, that this simply delays the right of forfeiture – it does not extinguish it. Therefore you may be able to seek forfeiture at a later date. Other options to consider include use of the rent deposit, pursuing a guarantor or a former tenant. Please do contact us and we will be able to assist with any queries or concerns which you might have.