Covid-19 effects upon Landlord and Tenant

The coronavirus disease pandemic (COVID-19) has resulted in very real hardships in the economy generally but commercially between landlords and tenants.

Tenants are increasingly finding it more and more difficult to maintain regular rent payments and before landlords consider taking action against defaulting tenants it would be necessary for them to enter into rent relief discussions with tenants. Whilst this on the face of it may appear to be easy enough, one should consider that in providing relief to a tenant this has a consequential knock-on for landlords who may reasonably be in need of the income in order to discharge mortgage payments and service obligations in respect of common areas. On the part of the tenant there may well be third parties involved with whom the tenant has equity arrangements and as such negotiations between landlords and tenants may involve landlord’s mortgagee and tenant’s equity partners. Without canvassing all the due diligence that will be needed to be undertaken, one would need to have regard to whether a tenant is receiving business relief from governmental funding schemes and to also consider a current management account and balance sheet. There are complexities involved in this process on the part of both landlord and tenant. All things however being equal, there are a number of measures that landlords and tenants can consider:

1. Rent Security Deposit 

A landlord will have under a lease, a right to apply for the security deposit to cover rent for the next month or quarter and perhaps more than that depending on the size of the deposit that was secured at the time of completing on the lease and the landlord employing this approach should ensure the top up of the deposit by the tenant even if that means a fazed rent security top up deposit being paid until the full agreed deposit is achieved.

2. Deferred Rent Payments

A landlord and tenant can always agree that the tenant defer rent payments to a specified date and make arrangements for any such deferred rent to be paid back in instalments until the arrears rental liability is discharged. This approach may well place a burden on the landlord’s cashflow and result in the landlord carrying the burden of    paying for services of common areas or maintaining the premises where the landlord has a duty to do so in the lease.

3. Insurance and Bailout Payments

There may to an extent be relief for both the landlord and the tenant where the landlord has an insurance policy in place which would cover unpaid rent and for that matter may well be in a position to benefit from any bailout payments made to the tenant. The tenant on the tenant’s part would to the extent enjoy the relief of any bailout payment and these are avenues to be pursued. Very clearly in buildings of multiple occupancy it may be the case that a landlord may agree a benefit for one tenant but not another and this may be due to the ability of a particular business to continue operations albeit on a limited basis under COVID-19 restrictions and care should be taken to ensure that one agreement does not fit all tenants but that each relief measure should be negotiated separately and perhaps under a Confidentiality Agreement.

4. Lease Variation 

It is open to the landlord and tenant to agree a lease extension under a simple lease extension agreement to extend the term of the lease such that the tenant will have a longer opportunity to grow the business and in which a landlord can look forward to a longer period in which to enjoy a rental income and for that matter may also structure the arrears rents to be paid over a longer period. Clearly this procedure would benefit landlords and tenants where the unexpired term of the lease is rather short but notwithstanding the opportunity does exist for short to moderate term leases to vary the terms of an existing lease or grant a lease extension.

5. Guarantors

In instances where the lease benefits from a guarantor the landlord will have immediate access to the guarantor but care should be taken in this regard in order that the goose that lays the golden egg is not killed and it may well be advisable for a landlord to negotiate with a guarantor the payment of the rent over an extended period of time which will not only benefit the landlord but the guarantor. The landlord would clearly benefit by knowing that part of the rent is paid with a prospect of the full amount being paid in the future and the guarantor who is generally a director would have the assurance that the business can continue with the guarantor as director without facing bankruptcy proceedings.

The COVID-19 epidemic has certainly opened a new dynamic and it is imperative that landlords and tenants exercise flexibility and grace during the course of this difficult time and which ultimately will be in the best interest of all the parties concerned. 

The contents of this article do not constitute legal advice and are provided for general information purposes only.