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Rent reductions and rent holidays - guidance for commercial landlords

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Do you own an investment property? Are you a landlord of commercial or business premises? Has your tenant asked you for a rent free period or rent payment holiday? We are finding increasingly that our landlord clients are being approached by their tenants with such requests and so they are seeking advice on how they should respond.

What you are required to do as a landlord is set out by the terms of the lease that is in place. We are currently in unprecedented times and standard drafting for commercial leases has never anticipated times such as these. It’s highly unlikely your lease will require you as landlord to agree to any variation of the rent because of COVID-19. The lease is, however, the starting point. You should consider the terms of your lease and find out whether you are obliged to agree to the tenant’s request. We can assist you with that, call us now on 0161 696 6229 to speak to a specialist commercial property solicitor for a free, no obligation discussion.

If you are not obliged to agree to the tenant’s request it is still sensible to consider it. There are various things a landlord should consider in these circumstances:

  1. Do you want to avoid losing your tenant? Many businesses, particularly those in the retail and leisure sectors, have been forced to close. Their income will have been considerably reduced and so of course their cash flow will be affected. This effect on their business has not be caused or created by them. It has been unavoidable. Has your tenant previously been a good tenant? You should consider whether in normal times you would like to keep them as a tenant. Would you prefer to have a tenant occupying the property rather than a vacant property? What will it cost to find another tenant and could you find another tenant in these uncertain times? An insolvent tenant will in most cases not pay rent and the lease will be terminated. A variation or reduction in the rent could just help to keep a tenant’s business from insolvency.

  2. One of the important questions to consider is “what is the tenant asking for”? Have you been asked for a rent payment holiday? This implies that the tenant does not want to pay any rent at all for a fixed period but at the end of that period the tenant is willing to pay some or all of the rent for the holiday period? In simple terms, the same amount of rent will be paid but not on time. In contrast, is the tenant asking for a rent free period? That is the rent be reduced to nothing and won’t be paid in due course. Another option is that the tenant may be asking for a reduction in rent for a period of time. It is important to clarify what the tenant has asked for.

  3. How will COVID-19 affect the tenant's business? This is an important question to ask the tenant. How will their cash flow be affected? Whilst some businesses have been forced to close others are changing their sales structure. Shops may be closed but for some online sales continue. What government loans or grants is the tenant entitled to and when will they be paid? Landlords should not consider a request without seeking some data, budgets or figures to support a tenant’s request.

  4. For how long does the tenant want to vary the rent? The period of lockdown is uncertain but also it is not clear how businesses and the economy will be affected in the long term. It would be advisable for landlords to agree short term measures that can then be reviewed over time. If a tenant pays their rent quarterly then any agreement reached could be reviewed quarterly. Similarly, if rent is paid monthly a landlord may wish to review any agreement monthly or bi-monthly.

  5. As a landlord what ability do you have to agree any variation to the rent? If a landlord’s interest in the property is leasehold, a landlord has to comply with the terms of a superior or head lease themselves. There will be rent payable under that superior lease. A landlord obviously will not want to agree a variation in rent for the underlease if it increases the amount the landlord has to pay out in rent under the superior lease. In addition, it is likely a landlord will require a superior landlord’s consent to any variation of the rent.

  6. Does the landlord have a mortgage over the property? It is quite possible that the mortgage facility or terms do not permit a landlord to agree a rent variation without the consent of the mortgage lender.

At Stephensons our commercial landlord solicitors can advise you through this process. Our prices for considering the lease for you and advising on your options start from £350 plus VAT. Call us now on 0161 696 6229 to speak to a specialist solicitor for a free, no obligation discussion.