Commercial Lease Rent Reductions: Issues to Consider
The current government measures intended to reduce the spread of the novel coronavirus have caused major interruptions to thousands of businesses across the country, many of whom will have no choice but to seek an arrangement with their landlord to reduce or defer the rent payable for their business premises.
There are several solutions or combinations which may be reached between the parties, which may include:
- A rent-free period
- A percentage reduction in the rent for a specific period
- A deferral of the rent payment date, with the unpaid rent caught up over a period of time, in addition to the rent then due
Incentives for Landlords
On the whole, landlords will be keen not to lose their tenant in the current market. Although the government announced business rates holidays for certain industry sectors, they did not announce an extended holiday for empty property rates, meaning landlords will become liable to pay business rates if they lose their tenant. Furthermore, it could be some time before a landlord is able to find a new tenant. They may also be conscious of the risk of bad press for holding struggling tenants to their rent obligations. For these reasons, many landlords will be prepared to compromise in order to keep their tenant.
It is important for both sides that any adjustments are documents in a legally binding document. Although landlords may be amenable to granting relief to their tenants, they may well expect the tenant to cover their legal fees for doing so. Consideration should also be given to any service charges or insurance rent.
Why Use a Side Letter?
One of the considerations for landlords and tenants is how best to document any adjustments which are agreed to. Landlords are likely to prefer the use of a side letter, for the following reasons:
- It is a simpler document
- It is personal to the two parties (and therefore does not apply to a new tenant if the lease is later assigned)
- It does not affect future rent reviews
- It does not need to be registered at HM Land Registry (if the lease is for a term of 7 years or more).
However, if more major changes to the lease terms are being made, it may be necessary to use a deed of variation. This is a more formal legal document and likely to be more expensive for each side.
Please contact me on benjamin@patronlaw.co.uk if you wish to discuss your commercial lease.
