In these difficult times, many commercial tenants will be asking their landlord for a form of rent concession, whether that takes the form of a reduction, deferred rent, having a rent or service charge holiday or paying monthly
As a landlord, it is entirely within your discretion whether you agree to you rent concessions. Generally, the tenant has to continue to pay rent under the lease and rent is not suspended due to COVID-19. However, you may consider that action you take now might help your tenant to survive this economic downturn meaning you are more likely to receive rent in the future, and avoid having vacant premises with uncertainty over prospects to re-let in the post-coronavirus environment.
If you do decide you are willing to agree a rent concession, then the arrangement should be properly documented. There are two ways of doing so:
- A side letter – this documents a temporary arrangement which will not create a permanent change to the lease terms.
- A deed of variation – which creates a permanent change to the lease.
As the future economic climate is currently so uncertain, we would recommend only temporary changes are made at this time, by side letter.
Although it is tempting to come to some informal agreement with your tenant, we recommend the precise nature of the agreement is carefully considered and documented to avoid later disputes.
What do you need to consider when agreeing a side letter?
- For how long does it last? From the outset, it is crucial to consider the end. The concession could be said to run for a set period, or it could be brought to an end by notice. The termination provisions must be clear to avoid the arrangement potentially becoming permanent.
- To what does it apply? If the concession relates to rent, you need to consider carefully which rent it applies to. Whilst at first this may seem obvious, a lease can describe payment such as service charges, insurance premium payments and other costs incurred under the lease as rent. Is the concession intended to apply to these too?
- If rent is to be deferred, is interest to apply? And if so, at what rate and when is it payable?
- Is the side letter to be transferable? Clearly you and the tenant will be bound by the side letter terms. However, consideration needs to be given as to whether the landlord and/or the tenant’s successors in title are to also be bound by the side letter on an assignment of the lease. There are pros and cons for each.
- What is intended to be the impact of a breach? Is the tenant to forfeit the ongoing concession? It is to be terminable at the discretion of the landlord? Again, there will be pros and cons for each and you will want to obtain legal advice on the hidden legal effects of such measures.
- Is there a pending rent review? If the concession is intended to be a temporary measure, most landlords will not want the contents of the side letter to affect the rent review. Any intention for the side letter to be disregarded on a rent review, should be specified.
- Are there any other knock on effects of a change in rent? For example, is the service charge calculated by reference to a percentage of the rent?
- Is there a superior landlord? If so, the superior landlord's consent may be required.
- Is the premises mortgaged? If so, the lender's consent may be required.
- Is there a Guarantor? If so, the guarantor's consent may be required. Not involving the guarantor could risk releasing him from his obligations.
Our commercial property and property dispute resolution departments can provide you with more specific advice on the impact of each consideration and can look after the drafting and the execution of a side letter.