The pitfalls of rent-free periods and lease variations

We have advised several landlord and tenant clients over the past few weeks relating to the options available if tenants are unable to pay rents on time, proposing solutions for both parties.

Tenants are rushing to landlords seeking a temporary rental holiday and variations and landlords are being pressed for urgent answers thrown up by the current crisis.

Before agreeing to any rent-free period, landlords should stop and consider how a simple email or letter confirming this may affect them and their lease.

A landlord will want to avoid a situation where the variation of their existing lease (to incorporate a rent-free period) amounts to a deemed surrender and re-grant.

A simple variation, made by either adding to the demised property or extending the term of the lease, would surrender the existing lease and create an entirely new lease on the same terms. This could lead to Land Registry fees and Stamp Duty Land Tax issues for the tenant and importantly, for the landlord, it could grant the tenant security of tenure.

In addition, if there is a guarantor of the tenant’s rent in the existing lease, a surrender would release the guarantor from liability for any future breach under the new lease. Landlords should also take note that any variation which operates as a surrender will release any former tenants and their guarantors from liability relating to the tenant covenants. Therefore, it is imperative that the landlord must ensure that the right to their indemnity is not lost.

Paul Engelbrecht, Head of Commercial Property at Hughes Paddison Solicitors recommends that landlords and tenants wanting to agree any rent-free period or variation to lease terms contacts us directly to advise on such matters. This can include how to vary a lease by a “Deed of Variation” or a “Side Letter” so that the terms of the existing lease can be varied without operating as a surrender and re-grant, avoiding the unintended adverse consequences for both landlord and tenant.

If you have any questions, please contact our commercial property department on 01242 574 244 or at pe@hughes-paddison.co.uk