With uncertainty and financial hardship sweeping across the country, we recognise the impact this is having on landlords, tenants and families as much as on wider business.
The government has put in place further measures to protect businesses as part of the Coronavirus Act 2020, which was given Royal Assent on 25 March. Under the Act landlords of commercial premises are prevented from terminating leases by forfeiture for non-payment of rent until 30 June 2020. This date may be extended. This will of course be welcomed by tenants.
However as the duration of the COVID-19 outbreak is as yet unknown, we anticipate landlords and tenants will still seek to agree some form of rent concession agreement, most likely to cover a longer period which will then allow some breathing space for recovery. This article deals with what should be documented in a rent concession / side letter as this will no doubt be a popular way to help tenants pay rents by agreeing, between the landlord and tenant, one of the following:
- A reduced rent for a period;
- Altering payment terms, such as moving from quarterly to monthly rent payments; or
- Agreeing a rent free period and extending the term to coincide with the same period (note that the extension of the term will require a formal deed of variation)
Whilst the duration of the current situation is unknown, many landlords have actually been volunteering the concessions mentioned above, especially to those tenants who, but for the current outbreak, are excellent tenants. Such landlords see it as the opportunity to support such tenants at this unprecedented time.
However, landlords do have liabilities to adhere to and as such without any compromise they could too be faced with serious financial difficulties.
Our experience is that landlords are keen to assist tenants, particularly those that they have long lasting relationships with and have had no history of missed payments or breaches of the lease. Many of our landlord clients are also considering the potential PR issues (both positive and negative) arising as a result of their responses to the outbreak.
When a landlord and tenant do reach agreement on some form of concession, it is important that it should be documented in writing, with reference to the existing lease agreement. We would advise that any concession (whether it relate to rent as in this instance, or any other term of the lease) is documented in a side letter which is drafted by solicitors and is stated as being supplemental to the main lease.
Some points to focus on when dealing with such a concession are as follows:
- Clarity – the wording in the side letter should accurately reflect what has been agreed between the parties and for clarity should, if possible, reference the defined terns in the existing lease. When dealing with rent reductions the side letter should clearly state that all other sums due under the tenancy agreement are unaffected by the terms of the side letter. Parties must consider how long the concession is intended to remain in place. Ensure the concession is stated to be personal. It is important, particularly for the landlord that the side letter is personal to the tenant, meaning the agreement is with the tenant named on the letter and it cannot be passed on to a third party.
- Termination – the landlord should include provisions allowing withdrawal of the concession at any time, or for failure to pay the rent as amended by the side letter or otherwise comply with the terms of the lease. It is important for both parties to give thought to all of the terms of the existing lease, ensuring that the concession works with those terms.
- Forfeiture – if the landlord wishes to retain the right to terminate a lease early due to a tenant’s breach / failure to pay rent, the side letter should provide for this.
- Unenforceable penalties – if the side letter contains termination provisions, the landlord should ensure that these do not amount to an unenforceable penalty.
- Rent Deposits – If a rent deposit is in place, landlords may agree to take all / some payments due from tenants during the period of restricted movement from the rent deposit. In this scenario, the parties may agree provision for when / if the rent deposit is to be topped up by the tenant perhaps by reference to the tenant receiving any insurance or government monies. It is also important to give consideration to what happens when the rent deposit runs out.
- Payment of deferred rent – If the landlord allows a rent-free period or lower rent, it may be appropriate to include provisions to allow for recovery of that rent in the future, once the tenant is in recovery after the COVID-19 measures are lifted.
- Insurance and other support – Landlords should also be aware that some tenants may have insurance which covers them in respect of COVID-19 losses, or be eligible for government schemes. If the landlord is willing to agree a concession, it may be appropriate to make provision to recoup lost rent by requiring payment from any such pay-out for the difference in rent. These terms should be agreed with the tenant at the outset of any side letter where possible.
A side letter is an agreement between the parties to amend (temporarily or otherwise) the existing terms of the lease/tenancy. Both landlords and tenants are potentially in very difficult situations as a result of the extreme measures being put in place to cope with COVID-19, which is neither party’s fault. Where possible, in these unprecedented times, parties should try to work together to find a commercial solution that works for them and avoid disputes down the line. An added advantage to working together in these times is that a stronger landlord and tenant relationship may be formed going forward.
We understand that these changes and the general day-to-day uncertainty will cause worry for landlords and tenants, however, our team is ready to assist you every step of the way. Please contact David Cowgill, partner in our commercial property team, on 0113 849 4015 or email email@example.com.