The impact of the government’s measures in the face of the onslaught of COVID-19 having an enormous impact on most businesses. While the government has a number of schemes to alleviate the pressure on businesses, those businesses’ contractual obligations continue.
In respect of the landlord and tenant relationship, the government has brought in emergency measures to suspend forfeiture for non-payment of rent, but both landlords and tenants need to be mindful that the requirement to pay rent will not simply go away when the country is getting back to normal. Essentially, suspension of forfeiture will not last indefinitely and tenants will need to pay any rent payments they’ve missed.
The usual contractual avenues under which a tenant may seek to determine a lease, or mitigate one or more of the tenant covenants of a lease are unlikely to be successful when it comes to COVID-19. Tenants are unlikely to be able to rely on the usual contractual remedies of frustration, force majeure, and even uninsured risks when it comes to buildings being closed and businesses being shut.
It follows the best option for landlords and tenants in this difficult time for everyone is to negotiate how their relationship is going to work for the next few months, even years.
There is the option for landlords and tenants to enter into a side letter. This is an agreement between a landlord and a tenant that one of the tenant covenants will not apply or will be different to that set out in the lease. In the case of rent payments, it can make provision for a reduced rent or delayed rental payments. The benefit of this arrangement for a tenant is that it mitigates their obligations for a set period of time and adds certainty. For a landlord, agreeing to reduce or delay rent payments can add certainty to their cash flow projections and, in the longer term, ensure that their tenants remain solvent and back to paying full rent in the future.
Landlords should be aware that they cannot include ‘penalty’ clauses in side letters. While they may include a provision that states the full rent will become payable if the tenant breaches the lease, they cannot include a provision that requires all the back rent payments to be made.
If you want to discuss the possibility of using side letters to add certainty to your landlord and tenant relationship and mitigate the impact of COVID-19 on your business; or if you’re a landlord who’s been asked by a tenant to grant a side letter, give us a call on 0346 646 0406 or fill in our online enquiry form and we can take you through what’s required.