Requesting or dealing with requests for temporary variations in commercial rents

There has been a lot of coverage in the business media about commercial tenants seeking to change the payment of rents under leases and of commercial landlords trying to ensure they are protecting anticipated income as much as possible. Obviously it tends to be the big names and the contentious stand-offs that gain attention in these situations.

It is also important to consider any options in conjunction with the newly enacted (and soon to be amended) Coronavirus Act 2020 (“the Act”).

The Act imposed a temporary ban on landlords being able to forfeit (i.e. bring an end) leases for non-payment of rent from 25 March 2020 until 30 June 2020 (or longer if the government deems it necessary). This means that there is the potential for a tenant to remain in occupation of a property until at least 30 June 2020 without paying rent due to their landlord (although, unless agreed otherwise, the rent will still be payable).

The Act is also currently being amended to limit the powers of landlord to enforce payment in other ways, namely by taking possession of the tenant’s goods under the Commercial Rent Arrears Recovery procedure (CRAR), or by petitioning the court to wind up the tenant due to non-payment of rent. Once amended, the Act will give the Courts power to refuse a petition if the tenant can show the non-payment is due to the coronavirus outbreak.  The time limits in terms of CRAR will also be extended (so rent must be outstanding for a longer period before action can be taken).

That said, in our experience, both commercial tenants and commercial landlords are generally trying to be practical and proportionate in the face of very difficult circumstances. Some of the temporary compromises being considered and agreed include (sometimes combinations of) the following:

Rent Free Periods

In order to assist tenants through these difficult times, landlords may be willing to simply waive payment of the whole or part of any rents due for a given period.

Although clearly more popular with tenants than landlords, it does not necessarily allow for a compromise arrangement that spans a longer period of time.

Rent Deferment

Rather than agree a rent free period, landlords may be more inclined to agree a rent holiday whereby a given rent payment is agreed to be missed and re-paid at a later date. Clearly, there are different ways to approach this. Examples include tenants deferring a quarter’s rent and then paying an agreed higher level on the three subsequent payment dates or, if the tenant is a company, the directors personally standing as guarantor for the deferred sums.

Switching from quarterly to monthly payments

This option maintains cashflow for both parties but with smaller payments. This sometimes provides the flexibility that the tenant is actually seeking without requiring a more radical restructuring of the arrangement.

Switching from payment in advance to payment in arrears

Self-explanatory and, as with the previous option, improves cashflow.

As the above are concessions to the tenant, landlords may only be willing to agree them if they get something in return. In addition to the points above, they may want to extend the term, remove break clauses or existing “tenant-friendly” provisions in the lease.

The point we would emphasise is that you should liaise with your commercial property lawyer to ensure that you have fully considered any wider legal obligations. Even if you have already agreed a short term compromise – whether you are a commercial tenant or a landlord – speaking to your lawyer at an early stage will help you more fully understand your room of manoeuvre if you seek to finalise or further extend any initial agreed position.

For more information about the issues raised in this article, speak to Harrowells' Commercial Property Team.

Photo by Andy Falconer