Temporary Rent Concessions For Commercial Leases

A side letter may provide a short-term solution for a short-term concession.

For the benefit of all parties to a lease, a landlord needs to be flexible in the current challenging climate and in agreeing on a temporary rent concession with their tenant. However, how can a landlord ensure that such an arrangement does not become permanent?

The answer is a ‘side letter’ which records the agreed temporary alteration to the existing lease, and which is not intended to have a lasting impact upon the lease terms.

The landlord and tenant need to agree the precise temporary concession or alteration to the lease, how long the concession will last and who is bound by it.

In addition, both parties need to decide how the side letter will impact upon any forthcoming rent review.

Normally, a side letter is only intended to affect the landlord and the tenant who enter into it and is not assignable, but if there is an intention to pass the concession on to an incoming tenant, this will also need to be expressly provided.

Further, consideration needs to be given to any guarantor who is a party to the existing lease and whether that guarantor needs to be a signatory and consent to the side letter.

It is wise to ensure that the guarantor is separately advised to avoid any potential conflict of interest.

The side letter needs to be signed by the authorised signatories of both the current landlord and tenant. For example, if the tenant is a company then the signatory needs to be a director with authority to sign on behalf of the company.

If the lease is a sublease, the landlord will need to obtain the consent of the superior landlord to the side letter, and similarly the consent of a lender if there is an existing mortgage.

Given the impediment of imposed lockdown it is useful to know that the side letter can be created by email. The email should be sent by the landlord to the tenant and clearly and expressly set out the terms of the temporary arrangement. The email should require the tenant to confirm receipt and confirm that the terms of the side letter are understood and agreed.

Finally, if the proposed alteration or concession to the lease is more fundamental or permanent then, to protect both parties, a deed of variation needs to be entered into and registered at the Land Registry, as required.

The side letter, Letter to Tenant – Concessional Rent Arrangements, and a Deed of Variation of Commercial Lease can be found in By Lawyers Commercial Lease publication.