Stay Alert: Avoid Arrears: Totally Confused?

The lease says that rent needs to be paid in full each quarter or month, but the government seems to be saying that it may not be appropriate for the tenant to pay the rent.  You wouldn’t be alone in saying that you are confused!

“The Government has always been clear that tenants who are able to pay their rent in full should continue to do so, whilst those businesses that cannot pay in full should communicate with their landlord and pay what they can. Landlords should also provide support to businesses if they too are able to do so.”

What on earth does that mean?

This is being interpreted in many different ways, with some tenants that are genuinely struggling paying their rent, and other tenants saying “while we have the cash, we want to hold onto it in case we need it”.  This is not a “one-way street” in favour of tenants.  A (voluntary) Code of Practice for commercial property relationships during the Covid-19 pandemic has been issued by the government which states:

“landlords should provide support to a tenant where reasonably possible, whilst having regard to [the landlord’s] own financial commitments and fiduciary duties.”

The Government is also clear that government support is intended to help businesses to meet their costs (including rent):

“this support is intended to help them meet the costs of maintaining their businesses and saving jobs. We recognise rent is one of these costs [that the government is seeking to help tenant’s meet].“

The Code is also clear that certain sectors are expected to have greater needs than others (with hospitality, leisure and parts of retails having the greatest need).  We have covered the Code in a little more detail in another of this issue’s articles.

Here are a few tips:

1. This is not a “one size fits all” situation – and the correct approach will depend upon the specific situation of both the landlord and the tenant.
2. Consistent with the Transparency principle of the Code, tenants should offer (and if not offered then landlords should request) information regarding the tenant’s actual financial position (for example, details of the assistance being secured from the government, revised turnover/profit, forecasts and/or management accounts).  If the landlord has particular financial problems then the landlord may wish to provide information.  It is surprising how many decisions are being made without any concrete information.

Financial planning:

1. Tenants may find it more helpful to secure an agreement in order to plan for their business recovery.
2. Tenants may be eager to avoid liability for interest for late payment (usually 2-4% above base rate) rather than simply avoiding the issue.
3. On the other hand, if a tenant is not reasonable then a landlord may prefer to wait and enforce the terms of the lease; delaying enforcement and claiming interest may be preferable to the landlord if nothing positive is offered by the tenant.  This is probably the last resort, but it ultimately depends on whether what the tenant is offering is reasonable – i.e. what “bird in the hand” is offered.

There are a menu of options, which you may want to consider in the following order:

1. No concession:  if a concession is not justified and/or the landlord is equally in need, then a concession may not be appropriate.
2. Monthly rent payments, rather than quarterly.
3. You may want to draw down on a rent deposit (although you may want to delay using that) – potentially with agreement as to a slower period of topping up the deposit.
4. A deferral of the whole or part of the rent for one or more payment periods.
5. A full or partial rent-free period for a set number of payment periods.

Most of the options are not binary:  for example, paying a proportion, rather than all or nothing, or potentially a “mix and match” of the options.

You may want to consider regearing the lease (if there is something that might be attractive to the landlord in return):

1. Agreeing a break option or removing one
2. Extending the lease.
3. Changing the rent review dates.
4. Granting a rent-free but extending the term.

Whatever you decide, take care to record the arrangements properly, to avoid any unintended consequences and consider the following:

1. The arrangement may amount to a permanent variation of the lease.
2. You may want the arrangement to end if certain things happen (insolvency/assignment/re-opening of the premises)
3. The arrangement could impact on future renewals or rent reviews.
4. You ultimately need to be clear what is required and when:  otherwise the terms may be difficult to enforce if the tenant defaults (or if you do not want the landlord to change its mind).

Finally, if the landlord or the tenant act unreasonably this may impact on your future relationship (or the viability of the tenant’s business).  It goes without saying, but of course, we would be happy to help you navigate the options and processes and to assist in documenting the arrangements.

For a commentary on the Code of Practice for commercial property relationships during Covid-19 (and a link to the code itself) see our other article: Click here