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31st March 2020

In a Crisis a Pragmatic Approach is Key

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As is now all too obvious, the Coronavirus related lockdown measures have sent shockwaves through the commercial landlord and tenant industry.
Business occupiers are understandably concerned that their cashflows will take quite a hit in the short-term and are seeking to mitigate that by trying to reduce their rental overheads. Landlords have equally valid concerns regarding loss of rental income from defaulting, or insolvent, tenants and in most instances have mortgages to pay. Banks have concerns that their commercial loans, secured against properties, will not be paid and that the value of their security will be reduced by lower rents. Finally, in amongst this, everyone is trying to work their way through the labyrinth of furloughing employees and, in some instances, regrettably more severe measures, but so as to ensure that profitable businesses survive and that the economy bounces back as soon as possible and as little damaged as possible. To mind comes what Maynard Keynes called the paradox of thrift, which is this: if all of the economic actors go defensive and think of their own immediate financial concerns, then certain individual actors may get good deals, but as for the economy as a whole the outcome will be worse. If a more balanced approach is taken by most people, then the overall outcome will be more positive.

Applying the above thinking specifically to how tenants might consider negotiating with their landlords, there should be a consideration of what tenants may have to give to their landlords in return for the likes of rent free periods, rent holidays, deferrals of rent payments or the ability to pay rent quarterly rather than monthly.

So far, we have seen a lot of panicked tenants making requests or demands, obviously under a lot of financial pressure, without realising that they may have things of value in their current lease arrangements that they can trade with their landlords.

Whilst you can make some generalisations about the terms of leases, each lease is different. Therefore, tenants’ time would be well spent taking a close look at each of their leases in consultation with their property advisors and solicitors to work out a coherent negotiation strategy. Looking at the following may be fruitful:

  1. The presence and timing of tenant only break rights (that a tenant may be able to “sell” to the landlord in return for an immediate rent-free period);
  2. The length of the term of the lease and how long there is left on it (a tenant may want to offer to stay at the premises longer, thereby extending the landlord’s income stream long term, in exchange for a short-term rent-free period or rent reduction);
  3. The tenant’s repairing / dilapidations obligations (in return for “selling” a break right a tenant may want the lease varied so that they have very light repairing obligations and virtually no dilapidations costs at the end of the lease);
  4. The existence of a large rental deposit. A pragmatic landlord could be persuaded to take a rent payment from a large rental deposit, without requiring the tenant to top it up and agree to vary the terms of the rent deposit deed going forward (e.g. reducing a 6-month rental deposit to 3-month rental deposit). To achieve this boost to cashflow a tenant may have to put up a guarantor as the price of the bargain; and / or
  5. Even agreeing to settle a rent review early, so as to give the landlord some prospect of a modest increase in rent in the future.

The tone of tenants’ communications with landlords may need adapting depending on who the relevant landlord is and on what relationship or history they have with them. There is more strategy to this than many tenants, or indeed law firms, realise.

We have seen certain lawyers offering to send standard form letters to clients’ landlords for very low fixed fees. We think that such an ‘off the peg’ approach will not give clients much value and that approach does not fit with Hewitsons’ absolute client focus approach to our practice.

Whether you are a tenant, or a landlord, and would like to discuss any of the above options and how they might apply to your specific situations, please don’t hesitate to contact David Wells via email, or one of the other members of the real estate team at Hewitsons for assistance.
David Wells
David Wells

Partner and Joint Head of Milton Keynes Office

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