Understanding Rent Concessions
In this second article in our series about commercial rent arrears, we take a look at requests for rent concessions by tenants and the pros, cons and implications for the landlord.
What is a request for a rent concession?
A rent concession is a reduced rent offer provided by a landlord to a tenant. This can be a one-off incentive or for a longer period. It can also include waiving fees, a rent holiday, rent deferral or switching from quarterly to monthly rental payments. Rent concessions are commonly used as an incentive and means of attracting tenants. However, a landlord and tenant can also agree a rent concession during the course of a tenancy pursuant to a request for a rent concession from the tenant.
Requests for rent concessions
A rent concession request is a formal request to a landlord for a temporary reduction or suspension of rent payments. A tenant may make such a request if they are in financial difficulty and /or unable to pay the rent. The request will usually be made in writing and will also outline the terms of the concession sought as well as explaining the reasons behind the request. Requests for rent concessions were particularly common during and in the aftermath of the Covid pandemic.
Landlord’s response to a request for a rent concession
Following the receipt of the request, the parties will normally enter into discussions. The landlord may need further information about the tenant’s financial circumstances. Other factors that the landlord will want to take into account include whether the concession is requested just in respect of the principal rent or if it includes service charge and insurance payments and whether the payments will be deferred or waived. Of course, the tenant’s track record is also likely to be relevant such as whether they have breached any other terms of the agreement and whether they have been good tenants.
If the rent is to be deferred, the parties should consider and agree the terms of the repayment (i.e. will they be paid in instalments and will they include interest?). Other considerations for the negotiations are whether there should be any restriction of trading and the circumstances in which the landlord can terminate the agreement. Is there likely to be any bad publicity resulting from the negotiations and how should this be dealt with.
Finally, a rent concession may affect a landlord’s insurance policy, so it is essential that this aspect is fully investigated before any agreement is reached.
If the parties reach an agreement
If the parties reach an agreement, it should be recorded in writing. In some circumstances, the tenant may want the rent concession to be included in the lease. For example, if the tenant is taking a new lease or renewing an existing lease and they want any future landlord (in the event of a sale) to be bound by the agreement.
Usually however, where the lease is already in place, the agreement will be recorded by way of a side letter to the lease. Alternatively, the tenant may ask for a deed of variation of the existing lease. Whether this is appropriate and the pros and cons of this will depend on the circumstances involved.
If the lease is guaranteed, the guarantor should also be a party to the concession agreement because failure to involve them can mean they are released from their obligations under the guarantee.
What happens if the landlord does not agree to a rent concession request?
If the parties cannot agree or the landlord refuses the request for a rent concession, the landlord will have to fall back on other methods for recovery of the rent.
You can find full details of these here: Recovering Commercial Rent Arrears
What happens if the tenant still fails to pay the rent despite any concession?
The first port of call in these circumstances would be to check the terms of the agreement to see what provision, if any, was made for this. If no provision was made, the landlord will once again have to fall back on other methods of rent recovery as set out here but taking into account the terms of the concession: Recovering Commercial Rent Arrears
Pros and cons of agreeing to rent concessions
Every request should fall to be decided on its own facts and what is right in one situation, may not be in another. However, agreeing to a rent concession can be a way of building a better relationship with a tenant and may be a more timely and cost-efficient approach as compared to having to issue legal proceedings or pursuing other methods of recovery which can be lengthy, time consuming and costly.
In terms of the disadvantages, the landlord should consider whether a rent concession really is a realistic solution or just prolonging the agony of a struggling business. The landlord should also consider the impact on their own financial stability and on their insurance, and balance this against their long-term ambitions for the property. If they wish to sell in due course, what will be the impact, if any, on the value? Is agreeing to a concession likely to set an expectation from the tenant or future tenants of ongoing concessions?
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