The Importance of Rent Concessions in light of the COVID-19 Pandemic

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Article

14 May, 2020

Covid-19 has generated financial uncertainty across the economy. Consequently, tenants are more frequently approaching landlords to request rent reductions, rent free periods, and to alter rent payment dates in an attempt to share the financial risk and cashflow impact.

The first part of this article focusses on a variety of different rent concessions that the parties may wish to explore and the second part considers how such concessions should be documented in order to give those concessions legal effect.

Types of Rent Concessions:

Prior to agreeing to any rent concession, landlords should enquire whether their tenant has any business interruption insurance in place covering the tenant for any direct losses arising from Covid-19. Landlords should also consider whether their tenant is eligible for a government grant to provide relief for losses occurred during this pandemic.

The type of rent concession agreed between a landlord and tenant will vary depending on the individual circumstances, therefore, any blanket approach should be avoided. For example, a landlord should carefully consider the impact that any rent concession may have on any property finance they have in place, alongside protecting their investment value.

Ultimately, landlords will conduct a balancing exercise between their financial needs and those of their tenant, in the knowledge that failure to support a tenant during this pandemic could render the tenant insolvent, resulting in the lease being disclaimed and leaving the landlord with an empty property and no rental income. Parties should therefore aim to reach a compromise so that both can obtain some benefit from the agreement.

In light of the above, the following are some examples of the rent concessions which may be agreed to ease a tenant's cashflow problems:

  • A period of no rent or reduced rent (making clear whether this is repayable in the future or not);
  • Changes to the frequency of rent payments i.e. smaller monthly payments as opposed to larger quarterly payments;
  • Future repayment plans;
  • Providing more time to pay rent;
  • Accepting rental payments in arrears as opposed to in advance; and
  • Reducing the service charge payable.

Documenting Rent Concessions:

Once a clear understanding has been reached by both parties, the agreed rent (or other) concessions should then be recorded in writing.

  • It is recommended that a Side Letter is entered into to temporarily vary the terms of the Lease or a Deed of Variation for a more permanent arrangement. The Side Letter should contain the following elements to ensure that the parties are adequately protected:
  • Refer to the existing lease document;
  • Specify the reason for the rent concession i.e. to mitigate against the financial effects of Covid-19;
  • Specify the duration of the rent concession (given the uncertainty of the duration of Covid-19, it is anticipated that parties will seek to cover a period of at least 6 months to allow for potential recovery time);
  • Refer to the tenant personally to prevent the rent concession from being assigned to third parties, although a tenant should ensure that the Side Letter is expressed to bind the landlord's successors in title so the arrangement doesn't lapse if the landlord sells its interest;
  • Accurately reflect what has been agreed by the parties and use defined terms in the Lease where possible;
  • Re-affirm the landlord's right to forfeit the Lease i.e. the right to terminate the lease due to the tenant's breach of the lease or the tenant's failure to follow the agreed concession;
  • Record if any rent deposit is taken from the tenant as security for the concession; and
  • Record if any conceded rent is to be repaid once the Covid-19 restrictions are lifted.

Forbes Comment:

The current and unpredictable nature of the Covid-19 pandemic has 'forced' landlords and tenants to work closely together to promote a financial solution which provides benefits to both parties and gives a better chance of a long-lasting landlord/tenant relationship. Neither party should lose sight of the importance of documenting agreed rent concessions in a complete and proper manner, to avoid any confusion or dispute about the terms. It is recommended that parties communicate with one another as soon as possible and seek their own advice before committing to any changes and to properly document them.

For more information contact Helen Marsh in our Commercial Property department via email or phone on 01254 224217. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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