With every sector feeling the effects of recession, the debate on quarterly versus monthly rents and service charges is heating up. This article takes a look at landlord and tenant considerations in agreeing to such arrangements, how best to document them and other initiatives emerging in response to current market conditions.
The facts
In the current economic climate many tenants, particularly those in the retail sector, are struggling to meet quarterly rent demands and as a result landlords are under increasing pressure to accept monthly payments of rent, and in many cases, service charge. With many landlords themselves under financial constraints in the current market, some are simply not in a position to agree to this. Nevertheless, we are seeing increasing news of landlords and tenants agreeing to measures such as monthly service charge/rents and initiatives to drive down service charges. In some cases landlords are seeking financial compensation for agreeing to monthly rents, often valued at 0.5 to 1% of the annual rent, and a commitment from tenants to make payment by direct debit.
Beware of informal arrangements
Where landlords agree to monthly payments, they should be aware of the inherent dangers in not formalising any change from quarterly to monthly rent payments. Acceptance of a cheque for a monthly payment of rent where the agreement is only intended to be temporary (or where the landlord does not wish to agree to monthly payments at all) without putting any agreement in writing can jeopardise the landlord's position going forward. Landlords may face an argument of personal bar from tenants and find themselves unwittingly bound into such an arrangement for the remainder of the lease term.
Which parties need to agree to monthly payments?
In many cases, it is not a simple matter of landlord and tenant agreeing between them to change to monthly payments. Is there a guarantor? If so, the terms of the guarantee require to be checked and the guarantor should be a party to such an agreement. Failure to do so potentially leaves the landlord open to a situation where the lease is effectively varied and the guarantor is released from all its obligations. Is the lease in question a sub-lease? If so the wording of the sub-lease needs to be considered carefully to ascertain whether head-landlords consent is required to the arrangement. Does the landlord have a lender/security holder? In that case the landlord needs to check its finance/security documents to consider if the lender/security holder's consent is required to monthly payments.
Documenting monthly payments
As with all variations, the parties involved will have to agree the best method of documenting the agreement, such as by back letter or formal variation of the lease. Whatever the method, documents should be clear as to whether the arrangements are temporary in nature, in what circumstances they are to operate and whether they are intended to be personal to the current tenant, or capable of being transferred to assignees. Careful consideration should be given to other provisions in the lease, which monthly rents and service charge may impact upon, for example interest clauses, rent review and irritancy.
Monthly payments – here to stay?
Many see quarterly rents as "unduly burdensome" and "archaic". Whilst monthly rents are on the increase – with some even saying it is now the "norm" in new leases – only time will tell whether they are here to stay. In the meantime, developments highlight that monthly payments represent only one dialogue to be had between existing landlords and struggling tenants in the battle against the credit crunch. Other initiatives include a drive to reduce service charge by careful management of costs, with the British Property Federation stating that they "would support the philosophy that landlords should treat expenditure on rechargeable services as carefully as their own." Further reports indicate discussion between some leading landlords and tenants on insurance, rent review and lease structure in response to current market conditions. Watch this space....
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.