Over the course of the pandemic, many landlords have granted concessions to their tenants (particularly those in the retail and hospitality sectors), or have regeared their leases, to assist them to trade through these challenging times.
The most common arrangements we have seen put in place between landlords and tenants during this period include:
- rent reductions
- rent deferrals
- rent holidays
- turnover rent arrangements
In some cases, the landlord has granted these concessions in consideration of something being provided to it in return, often, a landlord break option, a renunciation of renewal rights, postponing or cancelling tenant break options or an extension of the lease term.
A landlord may also wish to consider whether receipt by the tenant of financial assistance from the government or a bank, or insurance monies, such as for business interruption, is to terminate the concession.
Varying leases: side letter or deed of variation
Typically, concessions or lease regears are documented in one of two ways; by side letter/supplemental agreement or by deed of variation of the lease.
It is important that landlord and tenants (and their respective advisors) are aware of the differences between each of these methods so that arrangements can be documented appropriately, as well as some unintended consequences which can arise, so that these can be avoided.
Typically a side letter is used where the concession being granted is of a temporary nature and is to be personal to the current tenant (it should be noted however that frequently side letters will bind the landlord's successors).
A deed of variation is more appropriate where there is to be a permanent amendment to the lease and any assignee of the tenant is to be bound. As a deed such as a lease can only be varied by either deed of variation or an agreement supported by consideration, if the consideration element is difficult to prove, the parties should opt for a deed of variation.
Great care must be taken when dealing with deeds of variation. There are the obvious stamp duty and VAT implications which can arise. However there are also other issues to be considered. If the deed of variation is deemed to be a surrender and regrant (meaning that the existing lease is terminated and a new lease created), this can lead to costly consequences for both landlords and tenants alike, such as invalidating deeds of renunciation and the loss of break options and rent reviews (including the loss of upward only rent reviews for pre-2009 leases). Consideration should also be given to whether the consent of a lender or a superior landlord is required.
While the Law Society has recommended that any such deeds of variation include an express provision to the effect that the parties’ intention is simply to vary certain terms of the lease and not to create a new lease by surrender and re-grant, the law in Ireland is not clear as to whether the intention of the parties is a determining factor.
Accordingly, landlords and tenants should exercise great caution in this area, and, where possible, consider alternative means of varying leases, such as the granting of a reversionary lease or an option to extend.
For more information please contact Sian Browne or your usual contact in Beauchamps.