Comment and insight from our recognised experts in property.
Use of Personal Concession Letters in the Covid-19 crisis
- AuthorEmily Wilson
The newly enacted Coronavirus Act 2020 is welcomed by many tenants. It has suspended a landlord’s ability to re-enter premises and take possession of it without court action (known in legal terms as “forfeiture”) where a business tenant cannot pay their rent due to coronavirus. These measures mean that, from 26 March 2020 to 30 June 2020 (a date which is capable of being extended by the Government), no tenant can be forced from their premises if they miss a rent payment. However, during this period, no action by the landlord will be regarded as waiving a right of forfeiture for non-payment of rent. As the Government has recognised, the most pressing issue facing landlords and tenants in the current Covid-19 Crisis is the payment of rent. However, the provisions of the Coronavirus Act 2020 do not completely alleviate this issue.
Most commercial leases only permit a rent suspension if the property is physically damaged, destroyed or unusable due to an insured risk. Typically, leases do not contain provisions for what happens in the event of a pandemic. Even where tenants are forced to close due to government requirements (such as the retail or leisure sectors), they will not be able to stop paying rent.
Tenants should review their own insurance policies (general liability insurance, business interruption, crisis management insurance and mitigation insurance) to ascertain whether losses due to the pandemic are recoverable. Save for enforced closures, early indications seem to show that a pandemic is generally not covered unless it is expressly stated in the policy.
We have already seen many landlords and tenants working together to find practical solutions and agreeing voluntary arrangements in relation to rent payments. This can be vital for tenants as it frees up some important cashflow. Whilst there is no obligation on landlords to agree a concession, it might be equally beneficial. Landlords may well rely on the payment of rent for their own cashflow and want to ensure the longevity of a good tenant, not to mention the potential reputational consequences which might result from a landlord’s response to the crisis. Before agreeing any rent concessions, landlords should consider their position under any loan facility or headlease.
Such arrangements can include a deferment, reduction or suspension of rent or service charge for a specific period or altering the payment dates, for example, changing from quarterly rent payments to monthly. Landlords may well want to ensure that they can recover the full rent later.
If a form of concession is reached, we would suggest documenting it by way of a Personal Concession Letter which is supplemental to the lease. There are a number of key issues to consider:
The wording of the Personal Concession Letter should accurately reflect what has been agreed between the parties. The amended rent or service charge and any revisions to the terms of payment should be made clear, as well as the period during which the concessions are made and any mechanism for terminating the concession early.
Where there is a guarantor to the lease, the landlord should ensure that they are aware of the proposals and are added as a party to the Personal Concession Letter. Amending the terms of a lease without the consent of the guarantor can have the effect of releasing the guarantor from their obligations under the guarantee. This could, of course, result in a compounding of an already difficult situation for the landlord.
It might be the case that a rent review is due during the concession period. It is important to state in the Personal Concession Letter that if this is the case any reduction or suspension of rent is to not be taken into consideration for the purposes of the rent review.
Alternatively, landlords may prefer to defer the review until a period of greater market stability. Most rent review provisions state that “time is not of the essence”, so there should be no significant prejudice to a landlord in agreeing not to trigger a review. However, generally the valuation of rent will be as at the review date as defined in the lease, regardless of whether the review is deferred.
As mentioned above, it is likely that landlords will require that any rent-free period, deferment or reduction in rent is recoverable in full and with interest at a later stage. The mechanism of this should be stated in the Personal Concession Letter.
Landlords should be aware that some tenants may be eligible for government assistance. Where a concession is agreed, it might be appropriate to make provision in the Personal Concession Letter to recoup any deferred or reduced rent by requiring payment out of such government assistance.
It is essential that the Personal Concession Letter is personal to the tenant and cannot be assigned to a third party, for example a subtenant.
In most circumstances the best starting point is communication. As stated above, reaching some form of agreement is usually in both parties’ interest. We would recommend that prior to opening discussions, both parties review their lease carefully and ensure that any communication is reviewed by a solicitor before it is sent.
We are monitoring Government announcements closely and are always available to assist you through this difficult time. For further advice on your commercial lease please contact …