Re-Gearing Leases During COVID-19

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There is no doubt that the current pandemic is causing an economic downturn, especially in the retail and leisure industry. As a result of the effect on businesses, commercial tenants are struggling to pay the rent. Therefore in order to survive the short term economic impact, landlords and tenants can consider reaching an agreement to re-gear their existing lease arrangements. This will not only obviously be beneficial to the tenants but also landlords who could be left struggling to find another tenant if the current tenant ceases to trade.

Any agreement needs to strike a balance between addressing the issues the tenant is currently facing and the need for the landlord to receive a steady flow of rental income. Landlords can assist tenants to ensure that their businesses do not become insolvent whilst also ensuring that they are not faced with paying business rates on empty premises.

This article explores the ways in which landlords and tenants can reach an agreement by way of various concessions. There is no statutory framework for re-gearing a lease and combination of concessions could be offered to assist tenants. Possible suggestions include:

  1. Rent Concessions – reducing rent so that the tenant only has to pay a proportion of the usual rent or varying the period when rent is paid i.e monthly payments rather than quarterly payments to assist with cash flow.
  2. Rent Free Periods – agreeing that a tenant does not have to pay rent for a certain period of time together with a possible postponement of any outstanding rent reviews.

In return for a rent concession or rent free period a landlord might ask its tenant to agree to remove the right for the tenant to break their lease early to ensure the lease remains for the contractual term proposed. An alternative would be to extend the terms of the lease to take into account the concession given during this period.

  1. Service Charges – reducing these payments by capping them for a period of time or waiving the charge usually imposed under the lease.
  2. Rent Arrears – a landlord could agree to allow a prolonged period for any rental arrears to be repaid by way of a repayment plan.
  3. Assignment – propose flexibility on this so that the tenant can sublet the premises in order to gain an income from other occupiers.
  4. Change of use – relax this to allow the tenant to carry out a wider range of business and create greater versatility for the tenant’s business.

The following methods can be used to give effect to the concessions mentioned above:

  1. Deed of Variation – the lease remains in place but a second document is drafted to record the agreed changes.
  2. Express Surrender and Re-grant – the previous lease is ended and a new lease is drawn up.
  3. Reversionary Lease – a lease that would start at the end of the current term.

Each method of amending a lease gives rise to a number of considerations and I set out some of the issues below:-

  • If a Deed of Variation is used to extend the term of a lease, this results in a surrender and re-grant of a new lease which means :-
  • Stamp Duty Land Tax (“SDLT”) may be payable by the tenant. Advice from the tenant’s solicitor should be taken as relief may be available but it is a point that must be considered.
  • The lease should be checked to see if the Landlord and Tenant Act 1954 applies. If a lease has been excluded from this legislation, an unintentional surrender could result in unwanted security of tenure for the tenant.
  • A lender’s consent may be required before any changes are made so if a mortgage is in place, legal advice should be sought.
  • Be aware of any guarantors as these might be lost if a Deed of Variation or surrender and re-grant has been entered into. If any terms are to change, the guarantor might have to be involved to make sure that the benefit of the guarantee is not lost.
  • If any new documentation is drawn up, it might have to be registered at the Land Registry.

If you are a tenant with a struggling business then engaging in an early dialogue with your landlord appears to be a sensible way of avoiding action being taken against you which could be detrimental to the business. Likewise if you are a landlord, helping to keep a tenant solvent and in occupation might be the best means of securing income from the property in the long term.

If you are a landlord and tenant and wish to re-negotiate the terms of your current lease, we can help you with these negotiations and draft the documentation necessary to formalise the new terms. If you would like to discuss your options in more detail please call 0345 646 0406 or fill in our online enquiry form and a member of our team will be in touch.