Covid-19: Five practical points for commercial landlords

In light of the recently announced government legislation to protect commercial tenants from eviction, many landlords are finding that their tenants, rather than making timid requests for rent concessions, are being firm and assertive in stating their position as to their perceived rights in relation to rental payments under the lease. This can leave landlords carefully considering their options and, for example, questioning whether to use any security given by the tenant at the outset of their lease in order to protect their own cashflow issues.

Whilst it is encouraging to see open and supportive dialogues between landlord and tenants (and you can read our note on rent concessions here), many landlords are looking for clear, practical solutions in an ever changing landscape.

We discuss five key issues on which landlords are seeking clarity.

1. Rent deposits

Whilst the current situation we find ourselves in could not have been envisaged by any party to a commercial letting even a few months ago, rent deposits are frequently taken at the outset of a commercial letting, precisely to cover the event of tenant default, and landlords can now look to call upon them. The terms of the rent deposit deed or agreement should be carefully checked to establish:

• on what basis can the rent deposit be utilised?
• what notice should be given to the tenant before drawing on any deposit?
• is there a requirement for the tenant to ‘top up’ the deposit if it is drawn upon?
• if so, will the landlord agree to waive that provision?

2. Guarantors

A guarantee might have been given in addition to, or in place of, a rent deposit when the lease was entered into. If that is the case, the guarantor will have covenanted as a primary debtor to be responsible for the rent and other sums due under the lease. If landlords and tenants are unable to come to a sensible solution in correspondence as to the payment of rent going forward, landlords can make a formal demand of the guarantor for the rental payments, which could have a powerful impact on negotiations.

3. Former tenants and guarantors

If the lease has been assigned, a landlord might be able to seek to recover rental arrears from the previous tenant or their guarantor. Landlords must serve a formal ‘section 17’ notice on the former tenant or guarantor within six months of the rent becoming due. Whether a landlord can rely on this will depend on a number of factors, including:

• the date of the lease
• whether the former tenant entered into an authorised guarantee agreement
• whether a former guarantor has been released from its obligations
• whether the lease has been assigned with the landlord’s required consent.

4. Undertenants

If a tenant is in rent arrears, landlords have a right to serve notice on any undertenant of the property requiring the undertenant to pay its rent directly to the landlord until the arrears are paid. Landlords should act promptly and take advice in good time before the next rent payment date under the lease. If a tenant has requested a rent deferment or concession, landlords should be asking if that tenant is continuing to receive rent from any undertenant.

5. Invoicing

If a concession has been agreed for tenants to pay their rent on a monthly instead of quarterly basis, it will be important from the landlord’s cash flow perspective to avoid accounting for VAT ahead of the tenant’s rental payment. Landlords should therefore remember to adjust their rent demands and VAT invoices accordingly, and perhaps credit and reissue if it is appropriate.

Landlords will be in the difficult position of striking a balance between their own needs, those of their tenants and the views of the world that is looking on. Additionally, there will often be banks and lenders in the picture and landlords should ensure that they are not falling foul of their obligations to their lenders in making concessions to their tenants. Landlords can only concede what their lender will permit, and not all banks and lenders will be making quick decisions on this.

Whilst each case will turn on its merits, landlords should not be afraid to scrutinise and ask questions of their tenants who are requesting rent concessions. What is the nature of their business? How are they being affected? What government packages are on offer to them? Not all of the points raised above will be palatable or available to landlords but it is important that they are in a position to make an informed decision about what options they do have.