16 November 2020
Property lawyer Mark Colquhoun highlights key questions which should be considered by landlords and tenants when negotiating COVID-19 rent abatements. First published in BTOveriew on 21st October 2020.
When negotiating new lease terms, should the landlord or tenant shoulder the burden of rent and other lease payments when premises are closed, or are only partially useable, due to Covid-19 (or similar) reasons?
While tenants are increasingly looking to protect themselves by negotiating the suspension of such payments when they are required to close (or operate at vastly reduced capacity) landlords equally need to ensure the capital value of their asset is not adversely affected.
Reaching agreement on the various questions posed below will depend on the individual circumstances of each deal, including the negotiating power of the respective parties.
So many rules! The current patchwork of restrictions means occupiers are affected differently in the Central Belt than from the rest of Scotland, while England & Wales is grappling with the new three tier system - all of which highlights that multiple localised measures are becoming the norm.
We’re closed! Wait, are we? For simplicity, the parties might want to agree a rent suspension in the event of mandatory closure only.
However, taking the example of the present heightened restrictions affecting the Central Belt, licensed restaurants and pubs are required to close – but are permitted to serve takeaways. Should that count as a mandatory closure for the purposes of suspending rent? Unless the clause is drafted carefully, a tenant could easily be caught out.
At the other end of the spectrum, a tenant might want a full suspension of rent if adversely affected at all by any restrictions.
Where a fair middle ground is sought, drafting to cover the possibilities can be a minefield!
Reduced Rent? A more nuanced approach might permit some reduction in rent where the use is restricted, but on what basis? How should it be calculated? Can another basis such as turnover be applied in such restricted circumstances? Should advance payments be refunded by the landlord to the tenant?
What’s the Use? The Scottish Government’s restrictions have moved from a blanket approach to individually targeted measures depending on the use, whether it is retail, leisure and hospitality, offices, gyms, education, care or the myriad of other sectors. As such the relative importance of a rent suspension clause will vary according to the permitted use.
But it’s Covid-20! Should rent only be suspended for Covid-19 reasons or should the trigger include a broader pandemic definition? What about a local epidemic or public health event?
Whose advice should be heeded – national government, local government, local authority, health board etc? Tenants will want to include as many of these as possible to cover all bases.
Why am I still paying for services? Should service charge or other common costs also be suspended/reduced? What about insurance costs?
Rent will normally be the prime concern for a tenant, but particularly where the service charge is very high as a proportion of rent, then it ought to be factored into the negotiation. We would not generally expect insurance costs to be suspended.
Oh when will it end? When and how should a rent suspension (or reduction) be brought to an end? Should the suspension period be capped? Should a right to terminate apply and if so, when?
Where premises are permitted to reopen on the easing of restrictions, it might still be weeks or months before the business can get up and running. Should rent be increased gradually, deferred or remain suspended until then?
We can help answer these questions and guide you around the pitfalls of such clauses, whichever side you are on.
Mark Colquhoun Senior Associate firstname.lastname@example.org T. 0131 222 2937