Flexibility in negotiations is key

Commercial landlords may need to be flexible with their tenants when it comes to rent negotiations during the pandemic.

The Government has extended its emergency measures to protect commercial tenants, which were due to expire on 30^th September, until the end of the year.  But this doesn’t alter the fact that some tenants are going to struggle to pay the rent.

Whilst the picture is varied, with some businesses continuing to trade as normal, the Covid crisis has certainly impacted on the ability of commercial occupiers to pay their rent, either because they have been trading at a reduced level of activity, or they have not been able to trade at all.

For those landlords whose tenants are struggling to pay the rent, it is vital to engage with tenants – early dialogue and regular communication is key; pretending the problem will go away never works.

There are a number of options which landlords might consider.  These include deferring the rent, perhaps with a quarter’s (or even two) rent being deferred and paid off over an agreed period of time.  Obviously this works better when there is still enough time left on the lease for it to be viable for a payment plan to work – and landlords must be confident that the business is fundamentally sound and will be able to catch up on the arrears when they start trading fully again.

Another option is to offer a rent holiday in exchange for extending the period of the lease.  The issues for landlords to think about here include the fact that they will not be able to recover the lost rent from the holiday period, and if the occupier is in financial difficulty, locking them into a prolonged lease might not be the best idea.

So should landlords be looking to reduce rents?  There is some uncertainty about what rents will do in the medium-term, especially in the office, retail and leisure markets.  For the landlord it is usually better to consider options such as a rent holiday or deferment, rather than reducing the rent, as this could have an impact at the time of future rent reviews.

Ensuring you have high-quality, prospering businesses occupying your property is always important, but it has never been as vital as right now, because any voids may be increasingly difficult to re-let, and doing so may involve re-assessing rent expectations.  Anyone letting a commercial property in the current climate needs to find a good balance between maximising rental yield and ensuring rent security.  Asking for rent deposits (rather than personal guarantees) is an increasingly good move.

Good quality tenants know that they are in a strong position to negotiate, and may be asking for flexibility in leases, including break clauses.  Landlords may have to be open to such demands in order to secure high quality tenants.

Communication is the key, allowing both sides to negotiate fairly to find a solution which benefits both parties.  Don’t wait for the quarter day when the rent is due, start engaging as soon as it becomes clear that there is a problem.  Landlords need to be prepared to be flexible, but for their part, tenants need to demonstrate that they are committed to fulfilling their part of the lease, even if they are experiencing short-term trading difficulties because of Covid.