Business tenants

Landlords must consider allowing business tenants on the brink of administration to pay rent every month instead of every quarter or face a possible double strain on income, a leading law firm has warned.

John Flathers and Chris Jones, both partners at Irwin Mitchell, said it could be beneficial for landlords and tenants to make the change as companies attempt to overcome potentially terminal cash-flow problems.

If landlords opt to enforce quarterly payments, they could face a double whammy of no rental income as they struggle to find replacement tenants as well as continuing to pay rates on an empty property.

But they would need to ensure that new contracts drawn up remain legally sound and do not make them vulnerable should trading conditions fail to improve.

The warning comes just days ahead of the first rent quarter day of 2009, on Wednesday (March 24th), when firms are expected to pay in advance for three months' tenancy. The last payment day, on Boxing Day, was a contributing factor in the high profile collapse of household name retailers and others are thought to be preparing for similar problems this time round.

John Flathers, who heads up Irwin Mitchell's commercial property team in Leeds, said: "Some companies, particularly in the retail sector, are facing very difficult times and this rent day will be particularly significant because it is the first of the year and will rely on takings over the Christmas period and a first quarter when sales have been slow.

"Nobody quite knows the true scale of the recession yet but it is inevitable that paying for three months rent upfront could prove to be a tipping point for those firms on the verge of administration.

"That needs to be carefully considered by landlords – particularly when they could be forced to deal with the double strain of no replacement rental income and paying rates on empty properties.

"But it still may be mutually beneficial for the tenants and landlord to draw up a new agreement which temporarily allows rent to be paid every month. If this happens landlords must ensure the revised contract that is drawn up is as watertight as the original, specifying that it is a measure lasting a specified time and retains the conditions of the original agreement."

Chris Jones, a partner in the corporate recovery department at Irwin Mitchell's Leeds office, added: "Major retailers will have hundreds of outlets across the country so will be in serious difficulty if they are in arrears and need to pay this huge sum.

As we saw recently with Stylo, some landlords are willing to take a risk and refuse to alter rents as part of a company voluntary arrangement. Those landlords at stores that survived are obviously in a better position having turned down the request but where administrators have shut the shops and surrendered the leases, landlords are suffering. Some won’t want to take such a risk and will make the switch to monthly rents."