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Commercial rent negotiations during the pandemic

Landlords and tenants need to have sensible discussions about the impact of the recent lockdown and restrictions on the tenants‘ particular businesses, sectors and circumstances and come to a mutually agreed position on the level of rent that is due and when it is to be paid in respect of the second quarter of 2020, which could be very different from the position set out in their commercial lease agreement.

This recent article in The Times explains that many commercial tenants in the UK were unable or unwilling to pay the rents due under their leases on the March quarter day this year - indeed, it states only 30% of the UK’s last quarter’s rent bill was paid!

The discussions between landlords and tenants may relate to the level of rent that is due in the second quarter of 2020, for example, 

  • a 50% rent reduction,
  • linking rent to turnover and / or
  • withdrawals from the rent deposit etc.

These discussions may also relate to flexibility in payment of rent during this period, for example,

  • from quarterly to monthly,
  • from in advance to in arrears and / or
  • grace periods for late payments etc.

Any agreements will be tailored, unique and bespoke to the particular circumstances of the parties. Such agreements should be carefully documented for the benefit of landlords and tenants alike for the following reasons:

(a) to ensure it is legally binding on all parties,

(b) to provide flexibility as the emergency develops and unfolds,

(c) to avoid any unintended consequences in respect of the rest of the provisions in the commercial lease agreement e.g. the release of a guarantor, and

(d) to ensure tight confidentiality provisions are also included so any reduced rent / flexibility of payment or other short term agreement does not have an inadvertent impact on future rent reviews and/or the provisions of any renewal lease.

It is important to bear in mind that these discussions may lead to further negotiations relating to other terms of the commercial lease agreement e.g. duration of term, upwards only open market rent reviews, additional break rights, etc and even, depending on the period remaining on the lease term, negotiations relating to renewal leases and/or lease surrenders.

The following measures have been announced by HM Government of Gibraltar to encourage commercial landlords to provide flexibility during the current pandemic to their commercial tenants operating in the relevant sectors as defined in the Civil Contingencies Emergency (Coronavirus) (Catering and Other Establishments) (Construction Shipbuilding and Repair) Regulations 2020:

  • Commercial landlords will be required to pay tax at a rate of 50% on the gross rent without deductions where they do not waive at least 50% of the rent due in the second quarter of 2020 for tenants in the relevant sectors.
  • However, these penalty provisions will not be applied where, for tenants in the relevant sectors, commercial landlords waive 50% of the rent due in the second quarter of 2020 and/or waive 100% of the rent due in the second quarter of 2020 and extend the commercial lease by a further three months. 
  • Tenants in the relevant sectors who are not afforded flexibility by their commercial landlords will be allowed a deduction against their tax liability of three times the amount of rent paid.

We await to see how these measures will be implemented into legislation in Gibraltar, whether the measures will be extended to tenants of office premises and tenants in excluded sectors and, finally, whether any support measures will be brought in to assist landlords of commercial property in Gibraltar.

This post does not constitute legal advice nor is it intended to be comprehensive. Our ability to assist clients during these challenging times remains unaffected. Please feel free to contact us for legal advice relating to commercial property in Gibraltar.

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