Are we also likely to see COVID rent suspension clauses in leases going forward? - Boodle Hatfield

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29 Sep 2020

Are we also likely to see COVID rent suspension clauses in leases going forward?

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Could landlords go further to support restaurant / pub / nightclub tenants? Some tenants might suggest that landlords agree (either on a lease renewal or in a deed of variation to a current lease) that rent will be suspended in the event of governmental restrictions on trading.

However, this type of clause could prove tricky for landlords. An institutional landlord or a landlord who is hoping to sell their reversionary interest to institutional landlord, will be wary of such a clause. Institutional landlords are looking for a guaranteed income stream; this type of provision would fly in the face of that certainty.

This type of clause could also be a barrier to securing finance or might put the landlord in breach of their existing bank facility.  Any bank would be concerned about how the landlord's debt would be serviced during a period of rent suspension. For completeness, this differs from a period of rent suspension due to the occurrence of insured damage, as that risk is mitigated by the loss of rent insurance commonly taken out by landlords.

We are therefore unlikely to see leases with a clause to suspend rent where there are governmental restrictions on trading. Instead, landlords are likely to opt to have the discretion to agree a rent suspension / postponement where they see fit. Tenants should communicate early with landlords where they anticipate difficulties paying rent due to governmental restrictions, as they have been doing in recent months.

On the whole, landlords had been supportive of tenants, but around 20% to 30% had been trying to put pressure on tenants to pay even if they couldn’t afford it, RSM partner Damian Webb said. “That is unhelpful because it means the good landlords end up subsidising the bad ones.” He agreed that the leisure sector in particular would see a widespread shift to turnover leases. “If you had said to landlords in January that they would have to accept rents amounting to 3-5% of turnover with a series of ratchets, they would have told you where to go,” he said. “But anything that happened before COVID is irrelevant now.”

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