Effective Communication and Collaboration Remain Crucial for Landlords and Tenants
18 June 2020
It was Charles Darwin who said that “It is the long history of humankind (and animal kind, too) that those who learned to collaborate and improvise most effectively have prevailed”.
This remains true today and thankfully the essence of what he meant can be found in virtually every high street and retail park in the land.
In these challenging times, many landlords and tenants have worked closely together to try and assist each other to weather the economic storm caused by the pandemic.
Here at Carson McDowell, we are finding that many of our landlord and tenant clients are reviewing their arrangements and are agreeing rent reductions, rent deferments, rent abatements or any combinations of these. The deals struck are often coupled with an extension in the tenant’s period of possession at the premises, at the end of the term of the current lease. Other concessions have included changing the frequency of payments of rent due from quarterly to monthly to assist with tenant cash flow.
It is always advisable to have any new arrangements properly documented so that each party knows where they stand, to prevent unintended consequences and to avoid potential disputes in the future.
Deed of Variation or Side Letter?
Any variation of a lease is most properly documented in a deed of variation, but if the intention of the parties is to create a personal concession without permanently varying the lease, then a side letter would be more appropriate.
In considering what deal to strike with the other side, parties must consider the duration of the concession; whether it applies to the principal rent or to all rents passing under the lease; whether interest will be added to any deferred payments; whether the concession is to be personal to the current tenant only; and whether the parties wish for the deal to remain confidential between them. From a tenant’s perspective, it would make sense for the concession to bind the successors in title of the landlord.
Landlords and tenants must also consider if the concession will come to an end by the passing of time alone or whether another means can be called upon. Further, landlords will wish to ensure that the concession does not impact on any impending rent review or lease renewal negotiations. For their part, tenants will want the comfort of knowing that the terms of any future break option will not be frustrated.
The parties should ensure that any requisite third party consents are obtained for the new arrangement (e.g. the consent of any superior landlords or lenders) and landlords would want to make sure that any tenant guarantor also signs up to the new deal.
Extension of the Term
A reversionary lease is usually the preferred method to extend the term of a lease where the new term is to begin in the future after the expiry of the current lease. This is largely to ensure that the transaction does not constitute a surrender and re-grant of the original lease, which would increase the tenant’s stamp duty land tax liability. Landlords will seek to ensure that any reversionary lease cannot be assigned separately to the current lease and will want a provision inserted to state that if the current lease is terminated otherwise than by effluxion of time, the reversionary lease will be deemed to have been determined on the same day.
It is encouraging to see this level of pragmatic collaboration in the market and this spirit of partnership should continue if at all possible. In the words of Henry Ford, “Coming together is a beginning, staying together is progress and working together is success."
We do however urge both parties to take great care in respect of how any of these arrangements are documented to avoid potentially inadvertent ramifications. We strongly advise that advice be sought at an early stage in negotiations and certainly well before any changes have been committed to.
If you would like any further information or advice, please contact Niall Hargan.
*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.