My tenant has asked for a rent holiday - do I have to agree?

The short answer is "no". The more nuanced answer is that in these difficult times, it makes a lot of sense for landlords and tenants to speak to each other and to be flexible where possible. Although it's true to say that landlord's don't have to agree, in many cases (particularly in the retail and leisure sectors) there will be genuine need, and if there are things that a landlord can do to help businesses which are otherwise sound to weather the storm, then they will suffer far fewer vacancies and stand a greater chance of maintaining an income stream from an occupied property in the medium term.  The challenge for all landlords will be trying to separate genuine need from those tenants who are trying to take advantage of the current situation.

Should I be waiving the rent, or just suspending payment?

As with much of the rest of this note, it's up for commercial discussion between the landlord and tenant.  Although it remains early days, we are seeing a number of different approaches to this.  Some landlords are agreeing to an immediate waiver of rent - essentially agreeing to forego the right to receive rent for a period of time.  Other landlords are agreeing to suspend payment, but only on the basis that the tenant pays the full amount once the suspension comes to an end.

In some cases, tenants are also agreeing to pay interest on the backdated rent at the usual 4% above base.  For landlords who go down this route, care will need to be taken that you don't inadvertently sink the tenant when this comes to an end and a full reckoning is due -- you are essentially providing a short term loan by way of rent deferral, and more debt may not be what a particular tenant needs.

For some sub-sectors, we may see an immediate bounce in business when movement restrictions are lifted, but others may take some time to re-build their businesses. If necessary, landlords should consider agreeing to staggered re-payments to allow tenants some time to catch up.

If we agree to this, when should we start?

This issue has gained a lot of traction very quickly because the next English rent quarter falls on 25 March, so it's an immediate problem for many tenants.  In Scotland, your lease might use the English days, it might use the new Scottish days (28 Feb, 28 May, 28 Aug, 28 Nov), a few leases might still be using the old Scottish days (2 Feb, 15 May, 1 Aug, 11 Nov), or you might have tenants operating on monthly rents.

So, for landlords who are under less immediate pressure (i.e. those whose next rent date is not until May), we recommend that you don't agree to anything immediately. Events are changing very quickly at the moment. New Government support is being offered every day and for now, it makes sense to us for these landlords to wait and get as much clarity as they can about the nature and extent of Government support, the extent of impact on the specific tenant's business, and if possible (although unlikely at the moment) some visibility on how long the current restrictions are likely to last for.  The better armed you are with this information, the better you will be able to judge how to shape any support that you agree to offer your tenant.  Our advice, however, is not to simply reject the tenant's request.  In times of great market stress, we consider it to be hugely important to keep dialogue going - so, let your tenant know that you will try to help if you can, but that it would be better to have the discussion closer to the next payment date, and in the meantime, ask the tenant to keep you regularly informed about its business plans and contingencies.

We appreciate that for other leases where the next payment date is more immediate, a quicker decision is going to be needed.

If I agree, how long should I give the tenant?

We have seen some tenants immediately asking for a 6 or 12 month payment holiday.  To our mind, that is too long.  At the moment, nobody expects the situation to normalise quickly, but equally, nobody has any real idea of how long it will last or the extent of the impact on individual businesses.

So, if your tenant is operating on a quarterly payment cycle (and assuming of course that you are minded to agree to their request), then our recommendation would be to agree to a 3 month arrangement and to let the tenant know that you will keep a watchful eye and you can both review the situation every 3 months thereafter in light of the circumstances at the time. 

Although it seems unlikely at the moment, if the coronavirus outbreak is contained quickly and we see a "V" shaped bounce back, landlords would quickly regret offering longer than necessary rent concessions. The point we would make at this time is that nobody can really predict what will happen, so try to maintain maximum flexibility.  However long you agree to, make sure that it is time limited.  You don’t want to accidentally remove the tenant's obligation to pay rent for the remaining duration of the lease.

Watch out for inclusive rents

Some leases provide for the rent to be inclusive of rates, service charge and/or insurance costs. If you do agree to suspend or waive rental payments, make sure that you are only covering what you intend to cover.

Confidentiality

Confidentiality wording is notoriously difficult to police. If possible, however, you want to avoid one tenant letting another tenant know what concessions you might be offering.  Each case should be viewed on its own merits and if tenants can stand on their own two feet, then they should certainly be encouraged to do so.  Although it might not be effective in every case, we still recommend the inclusion of confidentiality wording in any arrangement that you reach with tenants on this subject. In many cases, the very inclusion of what appears to be legally drafted wording will be sufficient to encourage tenants to act responsibly and to keep the commercial terms of the arrangement to themselves. We would also suggest that where appropriate, landlords stress to their tenants that the arrangements agreed with them are bespoke to their business and that the details should not be shared with other occupiers.  If your arrangement needs to be reviewed and renewed every 3 months, that might also encourage tenants to behave themselves, but as we say, there are no guarantees, and if the details of the concession do become common knowledge, it can be difficult to pin down with certainty whether the tenant is directly responsible for that happening.

Concession is to be Personal

In the current climate, it seems unlikely that many tenants will be assigning their leases, but if they do, you would probably want to have any rent concession fall away so that you could consider any new request based on better knowledge of the new tenant's business and needs.

What if I have a funder?

Technically, lender consent will be needed for any arrangement, so at the very least, you should make sure that you make sure that your bank is supportive of any decision that you take before you take it. That said, the Government is currently leaning on the main high street lenders to encourage them to act sensibly and the message that we are currently getting from our contacts at the big banks is one of concerned support - just like you, they don't want to end up with a slew of vacancies and for now, they appear to be taking a pragmatic approach.

How to document

Lastly, it's worth briefly touching on how to document these arrangements. A landlord will want to avoid the concession going on the public register (see Confidentiality section above) and it will want to ensure that the arrangement doesn’t inadvertently become a permanent alteration to the lease. It therefore makes sense to document these arrangements via a side letter.  Morton Fraser's commercial real estate team can help you with that.

Our key message

Landlords and tenants both need to keep talking. There are different ways to structure a rent concession of this nature, and how softly the landlord chooses to tread (or rather, how generous it chooses to be) should be determined by an individual tenant's business pressures and the landlord's appetite for risking ending up with a vacant unit (and the hold-costs associated with that).  Regular dialogue can help to strengthen a sense of partnership between landlords and tenants which could bear fruit in the longer term once this crisis is over.  In the meantime, we would encourage all clients to abide by government guidelines and to stay safe and healthy.