Dealing With Tenant Inability To Pay Rent In Commercial Leases During COVID-19

As business activity has reduced and cash-flow stopped in many sectors as a result of the COVID-19 restrictions, tenant inability to pay rent is an inevitability. In order to survive the economic impact, Landlords and Tenants alike will be eager to work through this time in a way that protects their investments and businesses and without resorting to potentially expensive litigation with no realistic prospect of achieving the desired result. Open communication between both parties at an early stage is critical and it is important that all concessions, variations of lease agreements and guarantees are documented in writing.

This article explores practical ways of dealing with tenant inability to pay rent in commercial leases as a result of the adverse impact of COVID-19 restrictions.

1. Concession by way of a Side Letter

Usually, concession arrangements are documented by way of a 1-2 page side-letter so they are quick to put in place and consequently offer immediate relief. Depending on an arrangement with its funder/s, a Landlord could be in a position to offer a commercial tenant a ‘rent-free’ or ‘rent suspension’ period during say Q2 (1 April to 30 June) or Q3 (1 July to 30 September) of 2020 by way of a side letter.

Any agreement reached regarding the responsibility to pay rent must be clear. A ‘rent free’ period is very different to a ‘rent suspension’ period. The latter infers that rent will be payable at some point in the future and interest on late payment may apply – which should be documented in the side-letter. Landlords could also consider moving from quarterly to monthly rent payments. Whilst the rent for occupying the premises could be suspended or written off by the Landlord entirely (subject to its funder’s requirements), it is strongly recommended that a tenant’s obligation to pay insurance, rates and service charges remain in place to ensure the Landlord’s valuable asset is maintained in accordance with good estate management practice. Business interest groups in affected sectors such as retail are reported to be lobbying the government for a waiver of rates for 12 months and it is important for a Landlord to ensure a Tenant would be in a position to avail of any reliefs in this regard.

The parties need to consider the circumstances in which the concessions would fall away – for example, consecutive non-payment of rent by the Tenant, persistent breach of other lease provisions or assignment to another tenant.

NB:  A Landlord and Tenant may consider agreeing ‘rent-free’, ‘rent suspension’ or ‘rent reduction’ periods in consideration for an extension of the term of the Lease or the removal of a Tenant break clause, for example. Whilst it is possible to incorporate the foregoing into a side letter, an agreement to vary the lease would be more appropriate. Both parties are reminded that if a Guarantee is in place, any variation of the Lease regarding term or rent will in most cases need to be agreed and confirmed by the Guarantor. Failure to do so could invalidate the guarantee.

2. Variation of Lease by Agreement

Variation of Lease Agreements are more detailed documents which may be necessary if a Guarantee is in place (as described above) or the recent agreement reached between the Landlord and Tenant in principle is intended to last long-term or it affects key operational clauses of the Lease which requires careful scrutiny. For example, a Landlord may agree to dispense with a ‘keep open’ clause in consideration for a Tenant agreeing to put and keep business interruption insurance in place which might require a knock-on amendment of the definition of Tenant ‘insured risks’ in the Lease. A Variation of Lease Agreement is similar to a Lease in that it must be executed ‘as a deed’ by both parties and if there is a Guarantor, it should be a party too or confirm the agreement by way of a separate document.  In addition, a Landlord funder’s consent to the variation will in most cases be required. However, Revenue has confirmed that no stamp duty is payable upon the execution of a Variation of a Lease Agreement and a stamp duty return is not required.

3. Mortgages

It perhaps goes without saying that Landlords will be required to engage with their lending institution before reaching any concession or variation of lease in principle. A letter of consent to the variation of the lease agreement will be required in most cases where a funder is involved. It is not in the interests of a lender to enforce against commercial landlords who are in arrears due to the COVID-19 crisis as the lender will be faced with the same problems as the landlord if it was to take possession – engagement may well be positive as a result. In addition, the Banking Payments Federation of Ireland has reported a joint plan of five pillar banks (AIB, Bank of Ireland, PTSB, KBC Bank Ireland plc and Ulster Bank) to introduce working capital supports for businesses affected by the impact of COVID-19 restrictions and Tenants with cash flow shortages are encouraged to avail of all available reliefs at this time.

It is extremely important that all concessions and variation of lease agreements are documented carefully in writing and that Guarantors and Lending Institutions agree to all relevant amendments.  An experienced solicitor in this area could assist a Landlord in protecting its valuable asset and a Tenant by ensuring the agreement reached reflects a fair and workable solution to the issues it faces during this difficult and uncertain time.