Coronavirus: should commercial landlords grant holiday, suspension or deferral for rent?

Generally speaking, landlords in Scotland have not yet suffered the same drop in rental receipts as their counterparts south of the Border.

Most landlords in Scotland will have received their usual advance quarterly rents on the traditional 28 February Scottish quarter day i.e. prior to the lockdown, whereas after the lockdown the rent roll receipts in England were down by as much as 50%+ for the English quarter day of 25 March.

That said, landlords in Scotland are likely to see the same level of drop off in rental receipts in due course and there are already an increasing number of requests for rent relief, rent holiday or rent deferrals.

What is being asked for when rent requests are made?

For businesses that lease premises, particularly those who operate in multiple locations, rent is one of the biggest fixed overhead costs and therefore it is no surprise that these requests are being made. Most landlords are very aware that they need to support their tenants for their mutual benefit, but it has to be remembered that they too have bills to pay.

If rent receipts continue to fall, landlords may be left in an invidious position; many will still have capital and interest payments due to their lenders and will have to meet their own overhead costs, including non-domestic rates and water rates on properties which they are seeking to re-let.

It is therefore key, from both landlords’ and tenants’ perspectives to be clear on what exactly is being asked for when the terms ‘rent holiday’, ‘rent suspension’ and ‘rent deferral’ are used, often interchangeably as if they mean the same thing.

From a landlord’s perspective, it’s not likely that their lenders are going to excuse and write off a portion of their loans and so the landlords are more likely to prefer a rent deferral where, as an example, one quarter’s rent is added in chunks of one third to each of the next three quarter days. That set up will be preferable to a landlord as they look to secure ongoing support from their lenders including waivers of any breaches of their financial covenants on account of rent deferral.

There are other ways in which support can be given to tenants such as rent-free periods, service charge reductions or changes to the manner in which rent is paid, eg quarterly rents can be converted to monthly rents or rent can be paid in arrears instead of in advance. In each scenario, there are quite different consequences and both landlords and tenants must be mindful of the effect on their cashflows and other contractual commitments, including lenders.

Setting out a formal agreement between landlord and tenant

Whatever temporary variations to a lease are agreed between a landlord and a tenant, such arrangements should not be left to informal agreement and should be carefully considered and documented to protect both parties’ interests, including:

1. Does any standard security/fixed charge over the relevant property, facility letter or funding agreement prevent or restrict rental concessions or lease variations?
2. Do the changes affect a head lease or sublease, where appropriate?
3. Should any guarantor of a tenant’s obligations be a party to the relevant deed of variation?
4. Precisely what form of support is being given and over what period; is interest chargeable and is there a need to adjust any other clauses such as rent review?
5. Is the support arrangement terminable if the tenant fails to meet the obligations, as varied, or if the tenant is sequestrated or goes into liquidation or administration?

Get in touch – we’re here to help

It is important that landlords and tenants take proper professional advice when structuring and agreeing any measures which could have the effect of varying a lease, in order to avoid any unintended consequences which could be prejudicial to either party.

Our team at Harper Macleod are here to advise and assist you in dealing with these matters. Please don’t hesitate to get in touch.