The worldwide outbreak of COVID-19 has brought unexpected uncertainty to both landlords and tenants.
Tenants concerned about imminent business interruption and consequent cashflow issues may find that long-term thinking landlords are willing to contemplate lease variations to:
- Grant the tenant a rent free period (or rent holiday);
- Restructure rent obligations so that the rent payable in the next 6, 12 or 18 months is reduced but with additional rent increases applying later in the lease term to compensate the landlord for these concessions.
Why would landlords consider rent holidays or rent restructuring?
The most likely scenario is that the landlord is not altruistic and will seek consideration in exchange for agreeing to rent holidays or rent restructuring. Such consideration could take the form of:
- Additional security such as bank guarantees or personal guarantees;
- An extension to the existing lease term; or
- Backloading the rent payable so that the tenant pays above market rent after the rent holiday or reduced rent period.
Landlords and tenants may have a good and longstanding relationship, in which case a landlord may be willing to grant short term concessions to help the tenant’s business survive these challenging times.
Landlords may prefer to have the ongoing tenant survive with reduced obligations, rather than have the tenant default, potentially with no assets to satisfy any claim for damages from the landlord. The landlord would then have to look for a new tenant in a market with fewer successful businesses looking for space.
Morrows can assist with both the approach to landlords to propose variations to existing leases and with drafting the necessary documentation to appropriately complete the agreed variations. Morrows can also assist landlords with advice regarding their rights and obligations under existing leases and drafting appropriate documentation to give effect to commercially agreed variations of lease.
For the most recent information regarding support for tenants please refer to Morrow’s latest article: Code of Conduct brings relief for tenants