By Lisa Stratford, Senior Associate in Irwin Mitchell's Real Estate Disputes Team
On 23 March 2020, the Government issued further “Support for Business” in the form of protection for commercial tenants against eviction / forfeiture as a result of non-payment of rent (due to the coronavirus) during the next 3 months. This will be welcomed by tenants. However as the duration of the COVID-19 outbreak is as yet unknown, we anticipate landlords and tenants will still seek to agree rent concessions, for example to cover at least 6 months (which may allow some “recovery time” for retailers). This article relates to any such additional agreement between individual landlords and tenants, which should be documented in a rent concession / side letter.
Indeed in these extremely troubled times, following Government advice to avoid gatherings and non-essential travel to reduce the spread of COVID-19 (including offices and work related spaces), and directing all hospitality, leisure and “non-essential” retail venues to close, many individuals and businesses may find themselves in financial hardship for some time, specifically affecting their ability to pay rents.
One way to help alleviate the potential struggle to pay rents would be to agree a rent concession between the landlord and tenant, such as:
- Reduced rent (or perhaps suspending rent entirely) for a particular period
- Altering the payment terms (e.g. switching from quarterly to monthly rent payments).
Whilst the duration of the outbreak is unknown, many landlords have been volunteering such concessions, especially to tenants who, otherwise, are perfectly capable payees and model tenants. Our experience so far is that landlords are keen to assist tenants, and many are also considering the potential PR issues arising as a result of their responses to the outbreak.
When a landlord and tenant do reach agreement on some form of concession, it is important that it should be documented in writing, with reference to the existing lease agreement. We suggest any concession is documented in a “side letter” which is supplemental to the lease.
In particular, consideration must be given by both parties to the following points:
Clarity on the payment terms – the wording in the side letter should accurately reflect what has been agreed between the parties and for clarity should, if possible, reference the defined terns in the existing lease. The amended rent (and other sums due under the lease) should be made clear in the letter, along with any revised terms of payment. The concession agreement should explicitly state that all other sums due under the tenancy agreement (which are not varied by the concession) are unaffected by the side letter. Parties must consider how long the concession is intended to remain in place.
Ensure the concession is personal – the landlord (especially in a commercial tenancy) should ensure that the side letter is personal to the tenant, meaning the agreement is with the tenant named on the letter, and cannot be assigned to a third party in any way.
Withdrawal/Termination – the landlord should include provisions allowing withdrawal of the concession at any time, or for failure to pay the rent as amended by the side letter or otherwise comply with the terms of the lease. However, parties may wish to exclude compliance with certain terms from this, such as “keep open” clauses. It is important to give thought to all of the terms of the existing lease, in order to ensure the concession achieves its aim.
Forfeiture – if the landlord wishes to retain the right to terminate a lease early due to a tenant’s breach / failure to pay rent, the side letter should be drafted to explicitly state as much. For example, it might be wise to amend the re-entry/forfeiture provisions so that a right to forfeit arises after each monthly rental payment (to avoid inadvertent waiver of the right to forfeit for the whole quarter’s rent) or, in the event that the tenant agrees to pay an additional rental ‘top up’ by future instalment, that that top up is also to be treated as rent which triggers the right to forfeit if not paid.
Unenforceable penalties – if the side letter contains termination provisions, the landlord should ensure that these do not amount to an unenforceable penalty. Landlords should take particular care when agreeing concessions requiring retrospective payment of the difference in rent “lost” through the months the side letter is active, especially where the termination occurs due to a breach or delay by the tenant of any obligation under the side letter or lease. In Vivienne Westwood Ltd v Conduit Street Developments Ltd it was held that for any side letter to have any sensible commercial effect, it was necessary to exclude a minimal breach of covenant from triggering the landlord’s right to terminate the side letter, and therefore the termination of the side letter was unenforceable. That case was slightly different, in that it was a commercial side letter agreement that was effective from the start of the lease arrangement between the parties (i.e. the concession was not agreed as a result of e.g. the tenant being in financial difficulty); however, it is worth bearing in mind when considering the terms of the concession.
Rent Deposits – If a rent deposit is in place, landlords may agree to take all / some payments due from tenants during the period of restricted movement from the rent deposit. In this scenario, the parties may agree provision for when / if the rent deposit is to be “topped up” by the tenant by reference to the tenant receiving any insurance monies or Government grant, and also considering what happens when the rent deposit runs out.
Recovering “lost” rent (see also, Insurance / Government Assistance) – If the landlord allows a rent-free period or lower rent, it may be appropriate to include a mechanism to allow recovery of the “lost” rent over a satisfactory period after any COVID-19 restrictions are lifted.
Insurance / Government Assistance – Landlords should also be aware that some tenants may have insurance which covers them in respect of COVID-19 losses, or be eligible for government assisted schemes. For example, many tenants may be entitled to a Government grant to alleviate losses incurred during the period. If the landlord is willing to agree a concession, it may be appropriate to make provision to recoup lost rent by requiring payment from any such pay-out for the difference in rent; the terms should be agreed with the tenant at the outset of any concession arrangement, if possible.
Final thoughts – it’s good to talk
Simply put, a side letter is an agreement between the parties to amend (temporarily or otherwise) the existing terms of the lease/tenancy.
Both landlords and tenants are potentially in very difficult situations as a result of the extreme measures being put in place to cope with COVID-19, which is neither party’s fault. Where possible, in these unprecedented times, parties should try to work together to find a practical solution that works for them, and to implement it in such a way as to avoid unnecessary disputes down the line. By doing so, parties may well be able to minimise the effects of the current pandemic to as short a period as possible.
This article was first published in CoStar on 24 March 2020.
Further advice from our lawyers to help you and your business through the coronavirus crisis is available here