Good intentions can be costly...
Nick Naddell considers why landlords need to pause for thought when they seek to address issues currently facing tenants as a result of the coronavirus.
Tenants up and down the country are approaching their landlords currently looking for a whole host of measures to help them plan for the next 3 to 6 months, and in some cases to ensure their very survival.
Whilst there will no doubt be some tenants adopting the mantra that one should never let a crisis go to waste, the vast majority will indeed be suffering in common with the rest of the business community.
It appears that most landlords are, where appropriate, willing to work with tenants to help alleviate immediate concerns.
Typically tenants are looking for rent holidays, rent abatements, capped service charge contributions and amended payment cycles.
It is absolutely vital that in agreeing to any concessions requested by a tenant that a landlord documents any agreement reached in an appropriate manner so as to avoid somehow being held to such concession for any longer than is strictly necessary or intended.
It is our view that any such concessions should be viewed as both temporary and personal. The most appropriate method to document such concessions should be a back letter granted by the landlord to the tenant with provision for the tenant to sign and return in order that there can be no doubt as to what has been agreed. (As an aside we may need to use a more innovative method of documentation but that is another discussion).
We believe it important for landlords to stress amongst other caveats at least the following key points:
- that the concession is an indulgence, entirely discretionary, and that the landlord is not bound to agree;
- that the indulgence can be withdrawn at any time;
- that the indulgence is personal to that particular tenant;
- that the indulgence, in any event, will last for a maximum period e.g. three months;
- that in the event that the tenant fails to adhere to the amended provisions or the tenant suffers insolvency the indulgence will automatically cease and shall be deemed not to have be granted at all such that the original obligation will be enforceable by the landlord;
- that the indulgence is most definitely not a formal variation of the lease.
Care should also be taken in the use of currently commonly adopted phrases such as rent deferment, rent free and rent holiday. What do they mean? Is a rent holiday the same as a rent free or does it simply mean that the rent is still due but it will become due and payable at a later date? If a cap is to be agreed for example in relation to service charge contribution, again is that a cap on the amount that can be collected reserving the right to collect the balance at a later date or is it an actual cap whereby any excess within the period of indulgence will simply not become recoverable at all.
Another aspect to consider is “something in return”. It may help a landlord to negotiate for example the removal of a forthcoming break option or an extension to the lease in return for the requested variation. Anecdotally a landlord is more likely to obtain something in return if a concession sought by a tenant is treated as a more formal variation rather than a short term extension.
The simple message is, the more clarity the better, and certainly, such agreements between landlords and tenants should be in writing and should not be left to rely upon what may be a quick exchange of emails or worst still just a telephone conversation.
A word of caution – a landlord should not document anything at all with only the tenant if there is also a guarantor. The guarantor must be party to the arrangement to prevent the guarantor from later arguing that the arrangement was not approved and thus relieving the guarantor from any continuing obligation at all. Also, it is worth noting that if a landlord has a security over the property in question lender’s consent may be required in relation to any agreement reached with a tenant – even if only documented by back letter.
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