COVID-19: Key points for a side letter for UK commercial landlords and tenants
The UK government recently announced that it is extending the emergency provision for tenants having difficulty paying rent on commercial leases as a result of the COVID-19 pandemic. The special provision in the Coronavirus Act 2020, preventing commercial landlords from evicting tenants for non-payment of rent and from issuing statutory demands and winding-up petitions, which initially applied until 30 June is being extended until 30 September 2020.
In light of this, we expect to see an increase in rent concessions being agreed between landlords and tenants. Rent concessions are most commonly reflected by way of a side letter.
Extreme care must be taken with the drafting of side letters to ensure they reflect the agreed temporary arrangement between a landlord and a tenant. This is particularly important now that shops are re-opening and the social distancing measures are being relaxed.
The side letters we expect to see in the coming weeks will reflect a tenant's past inability to trade, the reduced trade due to social distancing requirements and allowing for a period of trade to generate revenue so a tenant can start paying arrears and current rent.
Here are seven key points to consider when agreeing a rent concession side letter.
1. The side letter is personal to that particular tenant
A concern for a landlord would be that a tenant could assign their lease to a new tenant and that new tenant could avail of the same rent concession. It is best to expressly state that the rent concession does not apply to successors in title for the avoidance of doubt at a future date.
2. The side letter will last for a specific period
Although it looks like the lockdown restrictions shall be lifted for most businesses by the end of July, we do not know if they will be implemented again sometime in the future, should the government deem it necessary. On this basis, it would not be prudent for a landlord to agree to a period equivalent to the period that the tenant is unable to trade for. From a tenant's perspective, it is far better to agree to a specific period like three months.
On the other hand and from a landlord's point of view, the agreed period of time should be linked to when the tenant is trading from the premises. If a specified period of time is agreed, the tenant could potentially commence trading again during this period and still avail of the rent concession. To avoid this, a landlord will insist that the rent concession shall only last as long as the tenant is unable to trade from the premises.
3. The rent concession is not a formal variation of the lease
Again, this is similar to the first point. It would be very hard to argue that a side letter permanently varies the terms of the lease. However, it is advisable to expressly set this out for the avoidance of doubt.
4. Further protection for a landlord
A landlord may require further protection in respect of the deferred rent being paid over installments. For example having additional termination events and shorter time periods if an installment is missed.
5. Breach of obligations and insolvency
If a tenant fails to comply with the terms and conditions of the side letter, breaches the terms of the lease or the tenant suffers bankruptcy or insolvency, the side letter should expressly state that the rent concession will automatically and immediately come to an end. In such an instance, the rent concession shall be deemed not to have been granted in the first place so that the original obligation will be enforceable by the landlord.
6. Care should be taken in the use of certain phrases
Some may assume that a rent holiday is a deferral of the rent until sometime in the future. Others may believe that a rent holiday means a rent free period. Each party need to ensure they understand exactly what is being agreed.
7. Bank consent may be needed
Even though, it is a side letter, the rent concession may require the consent of the bank depending on the terms of the security. It is always important to check this, otherwise, it will mean the side letter is invalid. From a landlord's perspective you also want to avoid breaching any of your banking covenants.
For further information please contact Tomás McLaughlin, Senior Associate or any member of the Commercial Property team at A&L Goodbody Belfast for support on any specific COVID-19 related queries you have.
Date published: 26 June 2020