The emergency measures surrounding the Covid-19 pandemic have required some businesses to close in the short term, and led others to scale down operations considerably. Inevitably, landlords are being approached to agree rent holidays or concessionary arrangements by tenants. Understandably, the impact upon tenant businesses has been highlighted in the press but landlords are also directly affected, where rental income is significant to their business or pension arrangements.
Continuing dialogue between the parties is crucial. Tenants should contact landlords or their agents to discuss their short term issues and plans to try and secure their business. Landlords should engage (and consult with their agents) as they have an investment to protect. Only if both parties understand the practical situation and what they each are and are not able to do in the short term, will it be possible to work out arrangements operating as fairly and reasonably as possible in the circumstances.
Tenants should be prepared to discuss their short term plans for the businesses with their landlords, and what steps they are hoping or able to take in relation to available Government support and from other resources. Even if the business has had to close in the short term or reduce operations, it is unlikely that the tenant will be able to stop paying rent without breaching of the lease or tenancy. So, engaging with the landlord quickly is important.
The landlord will need to consider his own commitments. If there is a mortgage on the property, there will be repayments to meet. The lender’s consent to interim arrangements for a rent holiday or concession will probably be required, so (where applicable) the landlord should make sure that any agreement with the tenant is subject to sign off by the lender. Lenders should recognise exceptional circumstances, but will need to be satisfied that any request for a mortgage repayment holiday or concession is reasonable.
Cash flow is the key. Where rent is payable quarterly or monthly, perhaps an arrangement can be made to change this temporarily to smaller but more regular instalments. A landlord may also be willing to agree for rent payments to made in arrears (as opposed to in advance, on or before the usual quarter days) if this would enable the tenant to meet its payment obligations under the lease more easily for the time being. These types of arrangements will ease cash flow problems for the tenant without immediately reducing the level of rent received by the landlord.
Consider an interim arrangement only, perhaps for the next two or three months, subject to review. Most businesses will not be able to do anything other than try to manage the short-term cash flow position at this stage. Longer-term business plans will take time to crystallise, and may depend upon the extent of Government grants and other financial assistance the tenant is able to successfully apply for.
Arrangements should be clearly documented and in writing. Where the parties do not intend the arrangements to be permanent, it should be recorded that they are temporary and do not operate to formally vary the tenancy or lease. The conditions for the arrangement to continue should be clearly set out, and the circumstances where (if applicable) it is agreed that any rent can be clawed back. The consequences of the parties not complying with the temporary arrangements should also be made clear and recorded.
Where there are guarantors to the tenancy or lease, then the landlord will need to take care to make sure they also agree any concessionary arrangements otherwise proposed with the tenant. Best practice is for the guarantor to join in the document recording the arrangement and confirming agreement to it. There is otherwise a risk that the guarantor is released from responsibilities to the landlord, even if the concession is a temporary arrangement.
Both parties should check their business and property insurance cover, and consult with their brokers and insurers to confirm what cover (if any) they have for business interruption or loss of rent. This may not apply in all cases, but if some cover is available, it may limit or avoid the need for concessionary arrangements (at least for an initial period). Equally, if arrangements are agreed without checking the insurance position, this may limit or exclude cover which might otherwise have been available.
This note is for general information and guidance and is not legal advice.