The current market conditions have led to dramatic fluctuations and events in the Landlord & Tenant market. We have seen the balance of power between Landlords and Tenants shifting and many of the "norms" of the last decade no longer appear to be relevant.
Around the December 2008 quarterly rental payment date we saw high street names such as Woolworths and Zavvi falling foul of the "credit crunch". This has led to significant voids on our high street but these are by no means the only disappearances from our high streets or on industrial schemes. There are now more and more vacant units to be found as businesses across the different sectors of the economy suffer. It remains to be seen what the effect of the passing of further quarterly rental payment dates in 2009 will be!
Tenants are currently faced with contracting turnovers and increased costs whilst landlords are faced with difficult market conditions making it difficult to re-let, and if they can re-let, being unable to achieve the favourable terms that landlords have become used to. Landlords also need to consider carefully the implications of vacant units on their investment valuations and cash flows and the potential effect reduced income and increased costs may have on their own liquidity.
Where a tenant finds its business in difficulties or anticipates difficulties in making rental payments it is therefore in the interests of both landlords and tenants to discuss the situation as early as possible in an open, calm and realistic manner. This way trust can be maintained and all possible alternatives to the tenant going out of business and the landlord having a vacant unit can be fully explored. A landlord faced with a struggling tenant may be wise in the current conditions to consider temporary concessions in order to assist the tenant's business and avoid losing its tenant.
Common Concessions
Some of the concessions we are currently seeing being considered by landlords and tenants are:
- agreement of monthly rental payments as opposed to the usual quarterly payments;
- more flexibility in permitting underlettings and assignments;
- landlords accepting the partial surrender of leases where tenants are looking to scale down their operations and are unable to sub-let;
- all or part of the rent payable being switched to a turnover rent. This is particularly prevalent in the retail sector where anything from 10% - 100% of the rent may be paid on a turnover basis.
- rent free periods; and
- incorporation of break options.
Administration of Tenants
Inevitably there will be situations where the failure of the tenant's business cannot be avoided and a tenant goes into administration. In these circumstances, as when a tenant suffers any type of insolvency, the landlord should seek prompt legal advice in order to ascertain its rights and what steps it may take in order to protect its position. Where a tenant's business goes into administration, the landlord is subject to a moratorium which prevents it taking enforcement action against the company in administration without the consent of the administrator or an order of the court. The landlord therefore needs to deal with the administrator and is best advised to open up negotiations with them as swiftly as possible. This may also involve negotiating with a prospective purchaser of all or part of the assets of the insolvent business as the administrator may be trying to arrange a sale or have agreed a sale immediately prior to the administration commencing in what is often known as a "pre pack".
Administrators in these circumstances may wish to negotiate concessions on the basis of which they will continue to occupy the premises and pay rents to the landlord, possibly at a reduced rate. In the event that there is a potential sale of all or part of the assets, a landlord may be approached by the potential buyer to negotiate new letting terms or an assignment combined with the variation of the existing lease. In these circumstances the likelihood is that the potential buyer of the business assets is likely to be seeking all or some of the concessions mentioned above!
Summary
Whatever circumstances a landlord finds itself facing as regards a struggling tenant or a tenant faced with or in any sort of insolvency situation the best advice is always to take prompt legal advice, and in many circumstances the advice of a chartered surveyor to assist in negotiations. This will enable the landlord to consider carefully all the possible steps which it can or should take in order to protect its investment.
Similarly, a tenant facing difficulties is also best advised to seek prompt legal advice, and maintain an honest and open dialogue with its landlord.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
