Legal Briefing – Real Estate – 4 May 2020
Many major retail stores have had to close due to the coronavirus outbreak and some of them unable to provide an online service. TK-Maxx has closed all its stores amid the pandemic and has written to its landlords to say it will not be in a position to pay more than two thirds of its 349 UK stores and it needs urgent rent negotiations.
The Government guidelines expressly stipulates that all workers, except essential workers, are being told to stay at home. This is having a huge impact on commercial tenants who have had to close their premises as it is not feasible for them to remain open in this current climate. This has in turn led to major cash flow issues and further strain on how they will pay the next quarter rent.
Although, there is a moratorium on commercial evictions for the next three months for tenant’s who do not pay rent, this does not resolve the accrued rent arrears which under the term of the lease would still apply and is a breach of the covenants whereby landlords can still take action at a later stage. For the sake clarity and completeness, some parties would still want to document temporary reductions or deferrals in rent or alternatively switching from quarterly to monthly in advance.
Are Rent Concessions Obligatory?
No, it is entirely within the landlords’ discretion whether they agree to the tenants’ paying reduced rent, having a rent holiday or paying monthly. Generally, the tenants have to continue to pay rent under the lease and rent is not suspended due to coronavirus. It is entirely up to the landlords on how to deal with the current situation in such unprecedented times resulting in making difficult decisions.
If landlords agree on rent concessions, then this should be documented by way of a side letter which sets out the agreed changes and also the length of such changes presumably until the end of the lockdown and also allowing an extra few months’ concession to give tenants additional time in order to resume and start trading as usual.
Most tenants might insist on a Deed of Variation which would vary the Lease terms for the entirety of the remaining term of the Lease and makes it more permanent rather than a side letter which is only a temporary agreement. This is subject to negotiations and most landlords would only agree on a side letter which is more favourable to them.
The agreement is documented by way of a side letter which would set out the changes and also for how long it will last as a temporary arrangement.
Here are a few of tips to think through when you are considering a side letter:
- Is the Side Letter personal to you and does not include successors in title on assigning the lease and also would the side letter be enforceable on the change of Landlord?
- If there is a pending rent review (which is not fixed, index linked or stepped) it is best practice to state whether the rent change will be disregarded or not on rent review. The Rent Review provisions must be reviewed if time of the essence as this would leave Landlords’ in a strenuous position once the Rent Review date lapses unless this is documented on the side letter to take effect at a later stage;
- Do you need a side letter or Deed of Variation? A side letter is fine where you are documenting a short term change in rent arrangements as it is temporary. If you are changing the terms of the Lease for the duration of the Lease, then a Deed of Variation or supplemental agreement should be used instead. This is normally not preferable to Landlords.
- Make sure that the party signing the side letter or confirming in an email exchange has authority to do so.
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