The closure of all but essential businesses will inevitably lead to commercial tenants being unable to pay their rent and seeking accommodations to be made by their landlord due to the unprecedented global health crisis.
Commercial landlords must confront the reality that many tenants will simply be unable to pay their rent in the coming months due to the complete cessation of their business function. Eviction is not a feasible solution as, in most instances, there is no realistic prospect of putting in place a new tenancy. Even if a new tenancy were achieved, it would almost certainly be at a lower rent due to the decrease in market demand.
In the absence of government measures commercial landlords and tenants need to urgently address this issue:
Reaching an Agreement
Commercial landlords and tenants need to actively engage with one another other to find a solution. Some of options available are as follows:
Deferral of Rent
Payment of rent for Q2 and Q3 of 2020, for example, could be deferred. These payments could be spread out across the remainder of the term of the lease. If the lease is of a long duration, another, lesser, period within which the deferred rent is to be repaid could be agreed between the parties.
Extend the Term of the Lease
For leases other than “long leases”, the term of the lease could be extended by the period for which the rent is suspended. If, for example, rent is suspended for 3 months, 3 months would be added to the end of the term of the lease.
The landlord could charge interest on the rent once normal payment resumes in order to restore the landlord to the position, they would have been in had rent been paid in full during the Covid-19 crisis.
Re-negotiate the Terms of the Lease
It may appeal to some commercial landlords to forgive a portion of the rent in return for the re-negotiation of certain terms in the lease. For example, if a lease has 15 years left to run, but there is a break clause that kicks in in 2 years’ time, the landlord may deem it worthwhile to allow some forbearance on rent in return for the break clause being negotiated out of the lease. The same argument might apply to a rent review clause for example, particularly in circumstances where “open market rent” is likely to decrease significantly in the coming months. A Deed of Variation would have to be put in place for any change to the terms of the lease.
Forgive the Rent
If the landlord is in a position to do so, the rent could be forgiven for the period of the current crisis. However, this may not be practical for many landlords, particularly where mortgage payments are due (discussed below).
The above options can be tailored to the individual circumstances. However, it is of the utmost importance that any agreement between a commercial landlord and a commercial tenant at this time regarding the payment of rent is carefully documented and that legal advice is sought. While this may seem like an unnecessary expense at this time, a properly drafted legal agreement will guard against enforceability or validity issues, and potential litigation, further down the line.
Commercial landlords may wonder what they should to do about mortgage repayments that they are unable to re-pay due to the suspension of rent. Again, landlords must engage with their lending institution in order to come to some form of agreement. It is not in the interests of a bank to enforce against commercial landlords who are in arrears due to the Covid-19 crisis as the bank will be faced with the same problems as the landlord once they take possession. Additionally, many banks are currently taking pro-active steps to offer payment holidays or moratoriums to their customers so this option should be explored.
Where a Landlord has borrowings secured by the property, the consent of the landlord’s lending institution would usually be needed before any accommodation could be afforded to the tenant. Proper and meaningful engagement with the lending institution as well as the tenant is therefore vital.
This is a tumultuous time for all businesses, big or small, and we at Holmes O’Malley Sexton recognise the need to provide our clients with practical solutions in order to allow them to come out the other side of this global health crisis and be able to resume their business functions as normal. Please do not hesitate to contact Aoife Coughlan (Solicitor), Lorraine Power (Partner), are any of the other solicitor or partners on our Property Team should you require guidance or advice.
This article was first published in the Sunday Business Post on the 26 April 2020.