Rent concessions during the pandemic: considerations for commercial landlords

In an effort to mitigate the consequences of the coronavirus (COVID-19) pandemic, the government has intervened to impose regulation on the economic relationship between landlords and their tenants by:

• preventing a landlord from exercising a right of re-entry or forfeiture for non-payment of rent (section 82(1) Coronavirus Act 1982)
• preventing the service or presentation of a statutory demand (the Corporate Insolvency and Governance Act 2020), unless the creditor has reasonable grounds for believing that:

a) COVID-19 has not a financial effect on the debtor; and

b) the debtor would have been unable to pay its debts even if coronavirus had had a financial effect on the debtor

• restricting the right to distrain (the Taking Control of Goods and Certification of Enforcement Agency (Amendment) (Coronavirus) Regulations 2020).

Originally, these limitations were time limited until 30 September 2020, but the forfeiture and winding up petition restrictions have been extended to the end of the year, and the exercise of commercial recovery of rent arrears has been limited to cases where the tenant owes more than 276 days’ rent.

Smaller private landlords, particularly family trusts and charities, are being increasingly affected by these restrictions. These investors are being deprived of income needed to pay beneficiaries, fund payment of tax liabilities or fund charitable activities. In seeking to negotiate terms on which rental payments are to be resumed, such landlords, particularly those with national retail chains as tenants, have been faced with demands to:

• give rent holidays or rent-free periods
• introduce turnover rent elements into previously fixed rent leases
• renew leases earlier.

Landlords can wait until the moratoria are lifted and seek the recovery of the unpaid rent by threatening forfeiture and/or insolvency proceedings. However, many landlords (particularly smaller private investors) are increasingly agreeing to give such concessions in return for their tenants agreeing to resume paying some rents. There is, however, a danger that the objective of reinstating an income stream can outweigh a consideration of the longer-term consequences of the arrangement for the landlord.

What landlords need to consider when agreeing a concession

The decision to agree a concession should not be taken lightly or without evidence being provided by the tenant of the financial cost to it of the pandemic. Once a concession is agreed, then, in negotiating and documenting the concession, those advising a landlord should consider whether the arrangements agreed cover the following issues.

• Any rental concession should be personal to the current tenant.
• As the lease provides for, the obligations of the tenant to pay rent on the rent payment dates and any service charge should remain, but those payments will be payable, for the period of the concession, at the agreed lower rate. The position that the landlord should be looking to create is an estoppel of any right to claim rent at the higher rate during the period of the concession. This is as opposed to a bilateral agreement to vary the terms of the lease during that period.
• Any conditions the non-observance of which would end the concession need to avoid being construed as a penalty and, therefore, unenforceable. However, the fact that such concessions are likely to be agreed during the term of an existing lease, rather than from the date of grant of a new lease, is likely to assist landlords in arguing that such provisions are penal. The decisions in the cases of Vivienne Westwood Ltd v Conduit Street Developments Limited [2017] EWHC 350 (Ch) and Makdessi v Cavendish Square Holdings BV [2015] UKSC 67 are instructive in establishing this distinction.
• The concession should operate as a waiver of the obligation to pay rent at the contractual rate, but crucially, not an express waiver for the purposes of section 82(2) of the Coronavirus Act 2020, which provides that: “During the relevant period, no conduct by or on behalf of the landlord, otherwise than by giving an express waiver in writing, is to be regarded as waiving a right of re-entry or forfeiture…”.
• The concession should be disregarded on any rent review under the lease.
• The landlord should ensure that the concession does not affect the open market rental value of the property and, particularly, that the landlord may use the full rent due under the lease (that is, the rent without the benefit of the concession) as a comparable.
• The existence and terms of any concession should be acknowledged as not constituting fair or reasonable grounds to change the terms of the lease on any renewal under the Landlord and Tenant Act 1954.
• The concession should remain confidential between the landlord and the tenant.

Given the present circumstances, it would seem that such contractual arrangements are going to grow, if not in popularity, at least in necessity, in order to preserve the solvency of landlords.