In the current commercial climate where tenants are experiencing significant cash flow problems we are seeing an increase in tenants who feel that the burden of quarterly rental payments is now financially untenable and they are coming to us to ask about the feasibility of securing rent payable on a monthly basis.
This is a concession for the landlord who traditionally prefers quarterly payments to minimise the administrative costs of rent collection and of course to get the full rent quickly in order to ease their own cash flow. However, as the impact of the COVID crisis deepens on tenant businesses, it is arguably in the landlord’s best interest to accept rent in monthly payments, rather than effectively forcing the tenant into insolvency, leaving the landlord with no rent, difficulty in securing a new tenant at a similar rent and possibly even a liability to pay rates on the empty property.
This article sets out ways in which the concession arrangement can be documented and the main factors to consider for both the Landlord and the Tenant. There are two ways to document an alteration in the terms of the lease: by waiver or by variation.
A waiver is a personal agreement between the two parties, usually documented by way of simple side letter setting out the new terms and signed by both parties. It’s the cheapest and easiest method for which reason it is often favoured. It is important that no consideration is provided for the change and that the arrangement is drafted so as not to be binding on the landlord’s successors in title (as these features are each indicative of a variation and may mean that the document is construed as such).
For an example of a letter that is intended to be a waiver, download the templates at the end of this article.
Perhaps the most important features of the waiver are that:
- It is not intended to override the provisions of the lease, which remain intact, and
- That the landlord can end the monthly arrangement at any time.
From a tenant’s perspective, a waiver is not ideal as there is debate as to whether it is contractually binding on the landlord and may leave the tenant vulnerable, because the tenant will not be paying the rent strictly due under the lease. While the tenant might be able to claim that the landlord is estopped from enforcing the strict wording of the lease while the monthly rent arrangement is in place, an estoppel is an equitable remedy and the tenant may feel less comfortable having to rely on an estoppel argument, than if it had a binding contractual arrangement. This is a tension between the interests of the parties that is not easily resolved, particularly if the landlord specifically wants to avoid varying the lease.
A variation by deed has the effect of overriding the particular (specified) provisions of the lease and is therefore a more certain and binding way of documenting the new payment arrangements. It gives the tenant more protection but is less favourable for the landlord for reasons set out below.
For an example of a simple deed of variation, see the downloadable templates at the end of this article.
Ending the arrangement
Particularly where the concession is viewed as a waiver rather than a variation, it is quite common for the landlord to reserve the right to end the new arrangement. The terms on which it can terminate the arrangement are a matter of negotiation, but the landlord will normally want as few restrictions on this ability as possible. Often, the only requirement will be that the landlord gives notice of termination to the tenant. A tenant, however, will want to ensure that the notice does not have immediate effect and that it has time to find any sums due when the rent reverts to a quarterly basis. A tenant may also want the landlord’s ability to terminate to be triggered in specified circumstances, commonly:
- When the tenant’s profits (or turnover) exceed a certain level. This might be tied solely to the figures for the demised premises or could relate to the accounts for the whole of the tenant’s business.
- An agreed date. In these times of COVID, it is possible that the concession will be tied to the period of government lockdown or other measures.
When the monthly rent arrangement ends, the landlord will usually want any outstanding sums cleared and interest paid on that balance.
The landlord may provide that the concession will end automatically if the tenant fails to observe the terms of the agreement allowing monthly rent payments or it fails to observe any of the tenant’s covenants in the lease. This sort of provision will remind the tenant that monthly rent payments are a concession granted by the landlord and not a right and may help to encourage a tenant to comply with the lease, in spite of its financial difficulties.
However, where the monthly rent arrangement automatically ends the landlord (or new landlord) might be tempted to allow the tenant to carry on paying rent monthly. In doing this there is a risk that, by ignoring the fact that the agreement has ended, and treating it as continuing, the landlord creates problems for itself, in particular, it runs the risk of:
- Being estopped from treating the monthly rent arrangement as ended at a later date – although it usually has the right to terminate the arrangement at any time and is therefore not prejudiced by the estoppel argument.
- Varying the terms of the agreement by conduct which may mean that the landlord is then prohibited from terminating in respect of the particular event.
- Varying the terms of the lease by conduct to allow monthly rent payments.
Most significantly a landlord needs to be aware of the possibility to impact on its right to forfeit the lease after the rent arrangement has come to an end or where the tenant is in breach of the rent obligations under that rent arrangement.
Whether a particular rent concession agreement will waive the landlord’s right to forfeit the lease will turn on all of the facts and circumstances and careful consideration will be necessary.
Additional considerations for monthly rent concession
For tenants when deciding whether to ask for monthly rent concession:
- Care must be taken to ensure that the monthly rent payment (which in the open market may attract a rental premium) does not prejudice the tenant at rent review.
- The concession arrangement may trigger an additional payment for stamp duty land tax and so it is vital that legal advice is sought.
- Where the arrangement is by waiver rather than variation it is imperative that the tenant understands that the provisions of the lease are still enforceable. Where any aspect of the lease is contingent upon the tenant being up to date with all payments due under the lease, notably where the tenant wishes to exercise an option to break or assign its interest we would always advise a tenant to err on the side of caution and interpret its obligation strictly in accordance with the lease terms. In other words at the relevant date or dates for compliance set out in the lease (usually the break date itself of the date of application for consent to assign) the tenant should ensure that the full quarter’s rent has been paid.
- Notwithstanding its own arrangements with the landlord, if the tenant enters into any sublease of the property we would recommend that it asks for rent to be paid quarterly in order to protect its position should the landlord bring its concession arrangements to an end. Of course, the tenant can enter into its own waiver arrangements with the subtenant should it wish to pass on the benefit of its own concession.
Considerations for the landlord:
- Varying the lease could adversely affect guarantees and it will need to carefully check the provisions of the lease. Particularly as the tenant’s request for monthly payments may be an indicator of the tenant’s financial difficulty so foreshadow the need for the landlord to consider guarantors as its prime source of security.
- A variation to the lease which binds its successors in title to the reversion may make the lease less attractive to any potential purchaser of the landlord’s interest.
- Automatic termination of a waiver as a result of breach may be construed as a penalty.
- The effect of monthly payments on rent review should also be considered by the landlord and it may wish to include a provision to ensure that the concession will be disregarded for rent review purposes in case it has the effect of depressing the rent. Also consider the position if a review concludes late and the rent rises as a result. How might the effect of monthly rent affect the sums that the tenant might be obliged to pay as a result of the review, in particular, the calculation of interest?
To help you with the process of changing quarterly rental payments to monthly in order to improve your cashflow at this time, we have produced free template letters depending on which route you would like to take: a waiver of quarterly rental payments, and a deed of variation.
Please note that care should be taken when using template legal documents as each landlord/tenant will have its own circumstances that will need to be taken into account. If in doubt, take legal advice from our commercial property solicitors.