Rent Concessions - A reasonable request?

In the current economic climate it has become common for tenants to ask for rental concessions. Although it may be in a landlord's interest to agree in order to keep the premises occupied and the tenant trading, there are a number of important issues to consider.

What has the tenant requested?

Tenants suffering as a result of the global economic downturn are looking for ways to reduce expenditure and keep their businesses running by asking landlords to "share the pain". Many tenants want to pay rent by monthly instalments rather than the more traditional method of paying quarterly in advance. They are also seeking rent holidays and rent reductions to help them continue trading through a period of falling income.

If granting some form of concession keeps the tenant trading and the property occupied it may well be in the landlord's interest to agree, particularly following the abolition of business rates relief for empty properties. However, where such a request is made, a landlord should ensure that any concession is granted on terms that protect or even enhance its own interests.

The issues

When considering a tenant's request for a rent concession landlords should:-

  1. Request the tenant's detailed proposals for continuing to trade (including a statement of concessions being made to that tenant by other creditors), up to date management accounts, and an estimate of how long the tenant will require this concession.
  2. Check the tenant's payment history. Many tenants are using the current economic situation as an excuse to reduce expenditure. Has anything changed, or have they always struggled to pay the rent?
  3. Obtain regular reports as to the tenant's trading position and copies of management accounts. These may give an early warning if the tenant is failing and may enable the landlord to instigate contingency plans.
  4. Review the terms that were agreed at the time of the letting. Are they unfavourable to the landlord in any way? If the lease was negotiated at a time when the tenant had greater negotiating strength a landlord may have agreed terms that it would no longer accept. use the tenant's request as an opportunity to redress the balance, perhaps by way of a deed of variation of those terms.
  5. Ensure that rents are paid by standing order or by direct debit, if they are not already.
  6. Where possible, draw down on any rent deposit if there are any doubts as to its effectiveness as security in the event of the tenant's insolvency. A request for a concession may be an indication that the tenant is already in significant difficulty.
  7. Consider whether any mortgagee or guarantor needs to consent to the concession.

Eliminating risks when documenting the concession

Once an agreement is reached between the landlord and tenant it is essential to document it correctly.

Landlords should proceed with caution in the event that a tenant's request is accompanied by a letter for the landlord to sign and return as evidence of its agreement. Recording the agreement in correspondence is fine, provided it has been properly reviewed.

Any concession agreement should be limited in time and should be personal to both the tenant and the landlord. It should not bind their successors in title. An agreement can always be renewed if trading conditions have not improved by the time the arrangement expires. It must set out the events which will trigger the end of the concession e.g. breach of the terms of the concession agreement, assignment of the lease, the tenant ceasing to be in occupation of the premises, breach of the lease, or a specified level of improvement in the tenant's sales figures.

Many concessions can be granted without actually varying the terms of the lease. They will state that the lease will continue in full force and effect. So when the concession expires or is terminated, the previous regime will be reactivated. However, if the agreement covers more than just a change from quarterly to monthly payments it may amount to a variation of the lease. The danger lies in the possibility of unintentionally releasing any party which has guaranteed the tenant's obligations.

This might include contractual guarantors which are a party to the lease and former tenants which have entered into authorised guarantee agreements. It is essential that any guarantors consent to a variation of the lease to ensure that the guarantee remains enforceable.

Although a tenant's request for a concession may not come as a surprise in the current market, landlords should investigate the tenant's circumstances and revisit the terms of the lease and all guarantees before coming to an agreement.

Abigail Mitchell, Solicitor
Commercial Property Practice
email a.mitchell@pglaw.co.uk
tel 020 7591 3360

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