The economic disturbance in the global economy as a result of the coronavirus is having far reaching consequences. The economic shock on the property market has jeopardised the interests of both landlords and tenants and in many instances raised a need to revisit the terms within existing lease agreements. Business owners and landlords should act quickly and consider the re-negotiation of these terms. Proper commercial and legal advice at this time is essential to protect each parties’ respective interests.
When re-negotiating lease terms, it is important that both parties fully appreciate their counterparts’ position. Only then can meaningful negotiations take place.
It is important for landlords to understand that tenants have likely experienced a substantial collapse in turnover which has put their business at risk. The implications of this collapse in revenue will likely be severe and the change in circumstances may affect the tenant’s ability to meet its contractual obligations.
It is important for tenants to understand that their landlords, in many cases, have monthly obligations to a financial institution. A shortfall in rental income will not only reduce a landlord’s revenue stream, it will also jeopardise its ability to meet its required repayments, breaching contractual obligations to the bank or lending institution. If the landlord is a “professional landlord,” tenants should be aware that the landlord’s business is the operation of commercial investment properties. Lack of rental income represents a risk to the landlord’s business in the same way a reduction in turnover for a restaurant represents a risk to the tenant’s business.
Landlords and tenants are struggling, and they both need to understand that the current circumstances do not absolve either party of their respective contractual obligations. It is imperative that both parties work together to ensure their individual interests are protected. A solution should be devised with this objective in mind.
There are a number of options available to landlords and tenants such as:
Temporary rent freeze / “rent holiday” whereby a portion of the rent is deferred until a later date
Term exchange option (e.g. a rent abatement for term/break extension agreement)
Implementation of stepped rent whereby a reduction of rent in the short term is recovered later in the term
Waiving rent payments in lieu of an equity stake in the business
This is not an exhaustive list and there is no “one size fits all” approach because no one lease is the same. Additionally, all landlords and tenants have different obligations and business requirements—what works in one scenario may not in another.
One certainty is that tenants must act and engage with landlords as soon as possible. Ignoring contractual obligations in the short to medium term is sure to have severe long-term implications. There are instances where tenants have advised their landlord that they are simply not paying rent for the foreseeable future. Failure to pay rent or to engage with your landlord to come to an amenable solution could ultimately constitute breaches in contract, a build-up of rent arrears and costly legal disputes. A build-up of rent arrears and impending legal disputes will most certainly make the recovery of any business more difficult than necessary. It is worth considering the advantage your competitors may gain by engaging early with their landlords and coming to a mutually beneficial agreement.
The SFA and Duff & Phelps will host a Teams call on landlord tenant issues on 26 May at 11am, book on here.