Rent reductions and suspensions: protect your position

The COVID‑19 crisis has triggered a spate of urgent requests by tenants for rent suspensions.  Given the unprecedented nature of the current operating environment, pushing a tenant into insolvency and/or recovering possession of premises and having vacant units on the books at a highly uncertain time requires careful and realistic assessment by landlords.  

These are extraordinary times and ordinary commercial principles and considerations are not necessarily going to be appropriate.

So what should a landlord do if a tenant requests some form of rent concession whether that be in the form of a request to change the frequency of the payments or, as is more likely, a request for a rent suspension?

The first question to ask is this: are you prepared to accept the consequences of pushing the tenant to breaking point? Do you really want to be in a position where you are forfeiting the lease and recovering possession of premises?  Is a robust approach actually going to result in an outcome that is favourable to you as a landlord?  If the answer to that is “yes”, then you are at least making a carefully considered decision. Forewarned and forearmed. 

But in many cases, it will not suit a landlord in the current circumstances to push a tenant to the point of collapse and to be exercising rights of re-entry. So what is the compromise position?

The critical objective is to ensure that, whatever is discussed or agreed with the tenant, you do not do anything that prejudices your position as a landlord in the future.

It is screamingly obvious to emphasise that any form of agreement or concession that is agreed with a tenant must not only be documented, but it must be documented very carefully.  Making arrangements with tenants verbally or by way of an exchange of emails is a recipe for potential trouble as and when normal service is resumed in due course. 

There are broadly two methods of documenting a rent concession with a tenant. You can either document this in a simple Waiver Agreement or you can document the arrangement by way of a Deed of Variation. 

Waiver Agreement

This is often regarded as the quickest and easiest way of documenting a rent concession.  By entering into the Agreement, the landlord is agreeing to waive, temporarily, its entitlement to require strict compliance with the lease terms. By way of crude illustration, the landlord is essentially saying to the tenant “on this occasion I’ll let you off, but this is a one-off”. The landlord is not agreeing that the terms of the lease will be changed in any way.

Deed of Variation

A Deed of Variation is a formal agreement that actually varies the terms of the lease; you are changing the terms of the original contract that was entered into between the parties. Once the changes have been made, they become binding and enforceable. You have a new contract in place. 

Waiver or variation – which works best?

The aim of both a Waiver Agreement and a Deed of Variation is to provide certainty surrounding the core contractual position of the parties and, from a landlord’s perspective, to preserve and protect all of the landlord’s rights under the terms of the lease in the future. 

The critical advantage of a Waiver Agreement is that it will not ordinarily have any effect on the liability of a guarantor. A landlord can agree to waive compliance with obligations without inadvertently releasing a guarantor from its liability.

A Deed of Variation on the other hand can have the effect of permanently releasing a tenant guarantor from all liability. Varying terms, rather than simply waiving compliance, is something that therefore needs very careful consideration. Losing a guarantor could be a very costly mistake.

Rapidly changing circumstances call for swift assessments and rapid responses. A Waiver Agreement is a form of agreement  that can be drafted and signed in relatively short order. If drafted properly, it will provide a good level of protection for a landlord that wants to preserve a commercial relationship with its tenant without jeopardising its own contractual rights.

If you have any questions relating to any landlord and tenant matters, please contact Andrew Turner on 01242 586841 or at aet@hughes-paddison.co.uk