The Covid-19 pandemic and resulting governmental lockdown has created significant hardships in the commercial leasing sector, with many businesses struggling to meet their rent obligations.
Whilst forfeiture for non payment of rent is temporarily prohibited, this does not suspend the obligation on tenants to pay rent or grant a rent holiday – all leasehold obligations remain in place. This has led to many Landlords and Tenants exploring options for rent relief and a collaborative and sensible discussion between Landlord and Tenant is key to securing a solution that works for both parties.
The parties are free to negotiate whatever arrangement they consider appropriate having regard to their specific circumstances and requirements, however the following are examples of how rent relief might be structured:
- Rent Waiver
A Landlord may agree to forgo the rent due from the Tenant for a certain period – either in full by way of a rent holiday or partially by way of a rent reduction. Whilst this arrangement provides the Tenant with immediate relief, it places significant pressure on a Landlord’s finances and may have an impact on the Landlord’s financing arrangements.
- Rent Deferral
Instead of a rent waiver, a Landlord may agree to postpone the requirement to pay rent (either fully or partially) until a later date. A landlord has several options in terms of structuring the repayment, such as adding additional months to the term (see below), amortizing the deferred rent over the remaining term or other specified period, or requiring a balloon payment at a future date or after a certain trigger such as satisfaction of a financial test. Additionally, the parties should consider whether interest is to apply to the deferred amount and whether the concession will bind successors in title.
Again, whilst this arrangement provides the Tenant with immediate relief, it can place stress on a Landlord’s cash flow and its ability to service the other financial obligations it owes.
- Changes to rent payment frequency
The parties may wish to agree a move to monthly rent payments for rent and/or service charge in order to temporarily ease cash flow for the Tenant whilst ensuring the Landlord continues to benefit from full, albeit staged, rent payments.
- Application of rent deposit with a deferred top up
Where a rent deposit is held, in lieu of a rent deferral a landlord might decide to apply the rent deposit to the next rent payment due, while giving the Tenant an extended period of time to top up the deposit balance. This option eases the concerns regarding the Landlord’s cash flow, but is not without risk: if the tenant later defaults, the landlord may be left with little or no security deposit to apply towards its losses.
- Release of tenant rights
The parties may agree that in return for a rent concession, the lease is varied so that the Tenant gives up a future right or option e.g. break rights, exclusivity rights, or rights of first offer/first refusal.
- Extension of lease term
To compensate the Landlord for lost or deferred rent, the parties may agree to extend the term of the Lease to give the Landlord the benefit of an extended income period. Such arrangements need to be carefully considered and documented and may lead to an increased SDLT or LTT liability.
- Relief conditional on tenants pursuing insurance claims and/or governmental relief packages
Landlords may require that the availability of any proposed rent concessions is conditional upon a tenant having first sought recourse from insurers and/or government assistance. Landlords may insist on a clawback mechanism for the deferred or waived rent if and to the extent that the tenant subsequently receives insurance proceeds or other financial assistance.
The parties may well want to ensure that the terms of any rent relief arrangements are kept confidential: Landlords will be concerned that the other tenants may seek similar deals if they become aware of the terms of the relief package and likewise tenants may not want their employees, clients or the market generally to know that rent relief was sought.
Third party consent
Landlords will need to consider the terms, if any, of their financing and/or equity arrangements as well as the requirements of any superior lease or licence to underlet. These may prohibit entering into rent relief arrangements without consent. Where this is the case, early discussions will need to take place with such third parties to ensure that the parameters of what will be acceptable are understood at the outset of the negotiations.
All concession arrangements should be formally documented between the parties, either by way of side letter or deed of variation. Please refer to our separate briefing note on documenting rent concessions for further information.