Tue 24 Feb 2015

Different ways to change a lease

While sitting in our local restaurant enjoying a nice Valentine's lunch, my thoughts turned to the fact that the restaurant had recently reopened after changing ownership and I wondered what, if any, changes the new owners, as tenants, would have made to the lease.  Yes, sadly, that's the kind of thing that property lawyers mull over with their spaghetti carbonara!

This led me to think over the years of the various ways that we have seen tenants request amendments to their leases and how, with the changing market place in commercial property, these have been used. Essentially you can have a formal variation of the lease or a back letter (which includes rent concession letters). I cover all three of these below.

Lease variation

Sometimes the terms of a lease have to be changed. The tenant may want to change the use of the property and either or both of the landlord and tenant want this to be documented by way of a formal variation to the lease.

Another example of a scenario where a lease could be varied would be if the tenant wants to take on an adjoining unit in a retail development or another floor of an office development. Rather than entering into a whole new lease, the parties may be happy to vary the existing lease to include the other premises and the additional rent and other payments the tenant may have to pay.

Finally if the lease is about to expire, and both parties want to continue the current lease arrangement, the landlord and tenant may agree that the lease will be varied to extend the duration, rather than entering into a new lease.

As such for many years, and for varying reasons, we have seen leases being varied by way of a formal variation.

Back Letter

Sometimes, however, a formal variation is not appropriate or is not wanted by the landlord. Perhaps the landlord only wants the variation to benefit the current tenant or wants to keep the variation out of the public domain, so that other tenants won't be aware of it. A formal variation will normally be registered in a public register - to which anyone can gain access.

So e.g if a landlord has agreed to grant a concession to a tenant, but doesn't want anyone else to know about it, the landlord may require it to be documented by way of a back letter, which contains obligations on the tenant to keep the issue confidential.

The concession could relate to anything from a rent free period, use provisions, carve outs in relation to particular insurance obligations or service charge obligations or any other provision in the lease.

The right will usually be personal to that tenant alone - so that if the tenant chooses to assign (or sell) its interest in the lease, the concession would not benefit the new tenant.

The important point about back letters, from a tenant's perspective, is to ensure that if the landlord sells the property that any new owner is bound to give a back letter to the tenant on the same terms and conditions - so that the tenant's hard won concession won't be lost. If the provision had been documented by a variation of the lease, then its terms would automatically bind successor owners - but the same rule does not apply to back letters (in most cases).

Rent concession letters

In the last few years when tenants were having financial difficulties some landlords were known to give concessions to the tenant to assist them in trading through 'the bad times e.g by reducing the rent for a period or allowing the rent to be paid monthly, rather than quarterly, in advance (to assist the tenant's cash flow).

Whilst some landlords and agents would simply record this in terms of a series of emails or by discussion alone, others would enter into a rent concession arrangement with the tenant to document exactly the level of the concession and the terms on which it was granted.

Often, the tenant would have to show audited accounts to the landlord to justify the need for the concession and there would be strict conditions tied to the concession. This would allow the tenant to continue trading and would ensure that the landlord did not end up with an unoccupied building and a potentially insolvent tenant.

As the property market picks up we are seeing a reduction in the number of rent concessions being granted, but there is still scope for these to be used whether on a formal or informal basis

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