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Down-payment blues

06 Jul 2020 / Landlord and tenant Print

Down-payment blues

Addressing the fixed cost of rent will be key for many commercial tenants as they move to trade out of the crisis caused by the COVID pandemic.

The COVID crisis has had an unprecedented impact on the Irish economy, large sections of which were effectively put on ice by restrictions imposed to protect public health.

Although unable to trade, rent will have continued to fall due for many affected businesses. As Ireland reopens, many businesses will be weighed down by arrears of rent accrued during the lockdown, and by rents that are disconnected from the profitability of premises with reduced capacity, due to social-distancing rules.

Back in business

With market rents expected to fall in the wake of the pandemic, market-linked rent-review clauses may prove a useful tool for some tenants to cut their rent liability.

This option was not available for most tenants during the last financial crisis, as most leases included ratcheted ‘upwards-only’ rent-review clauses.

However, since the commencement of section 132 of the Land and Conveyancing Law Reform Act 2009 on 28 February 2010, any rent-review clause in a new lease must allow for downward reviews. It is important to note that section 132 does not apply to leases executed on foot of agreements for lease entered into before 28 February 2010.

As the in-built mechanism for varying the amount of rent payable under a lease, rent-review clauses have several advantages over ad hoc arrangements. The principles for determining rent, and the procedure for carrying out the review, are governed by the lease.

So, if a review can be triggered, the tenant will not have to hope for their landlord’s beneficence to obtain a reduction, and the level of rent set will not depend on the parties’ respective bargaining power. Leases typically provide for rent to be set by arbitration or expert determination in default of agreement.

An added advantage is that the rent set on review will be payable until the next review date (most often in five years’ time) – potentially locking in a low rent for a longer period than a landlord might agree as an abatement.

However, there are limitations to relying on rent-review provisions to seek a rent reduction. Many new leases only allow a rent review to be triggered by the landlord.

Often, such clauses were inserted precisely to stop a tenant from benefiting from a downwards review in the event of a market slump. If such a clause is present, the tenant will not be able to benefit from a review, unless they can convince the landlord to trigger one.

A further difficulty lies with the rigidity of rent-review clauses, which typically can only be triggered at specific dates (although, normally, time is not of the essence, so a review can be triggered after the review date – see Hynes Ltd v Independent Newspapers).

Rent reviews

Normally, the new rent is to be measured by reference to market rent on the specified review date, so if that date occurred before the crisis, the tenant may not benefit from triggering a review.

Apart from the law affecting upwards-only clauses, the operation of commercial rent-review clauses is a matter of contract, so each lease must be considered individually, and valuation advice sought, to determine whether a tenant can benefit from seeking a rent review.

Outside of rent-review provisions, the parties to a lease may agree to vary rent obligations to ease the financial pressure on a tenant. Such arrangements have the benefit of flexibility, as the parties can tailor the terms to the particular commercial circumstances facing them – but doing so requires agreement.

While the instincts of many landlords and tenants may be to put in place informal arrangements to maximise flexibility and minimise the costs involved with formal agreements being drawn up, the experience in the years following the financial crisis shows that informal arrangements can cause headaches down the line for landlords and tenants, as such arrangements often lack certainty as to their enforceability, duration and precise terms.

When putting in place such an arrangement, care should therefore be taken to ensure that any agreement is legally enforceable and is clear in its effect from beginning to end.

Money talks

The primary requirements for an enforceable agreement to vary the rent payable by a tenant are the same as those for any enforceable contract – capacity, offer, acceptance, intention to create legal relations, and consideration.

To the extent that such an agreement constitutes a variation of a lease, section 51 of the Land and Conveyancing Law Reform Act 2009 also requires that the agreement be evidenced in writing.

Consideration poses a difficulty for rent-abatement agreements, as the rule in Pinnel’s Case will normally prevent the commitment to pay a reduced rent from being treated as consideration for the reduction, as in Barge Inn v Quinn Hospitality (2013).

In order to be effective, such agreements should contain a clear collateral advantage for the landlord (such as the tenant giving up rights or taking on an additional obligation – as in Westpark Investments v Leisureworld (2012), where the tenant gave up rights to parking spaces) to constitute consideration for the reduction in rent, or be executed under seal to dispense with the need for consideration.

Where a collateral advantage is being relied on as constituting consideration for the rent reduction, it should appear on the face of the agreement – a tenant cannot normally rely on something not mentioned as constituting consideration: see Harrahill v Swaine (2015).

Rent abatement

In relation to the requirement for writing, a concluded agreement for a rent abatement that has not been evidenced in writing may still be enforceable if it is supported by part performance.

However, rent-abatement agreements may face particular practical difficulties in showing sufficient part performance, unless the agreement requires significant acts on the part of the tenant as consideration for the rent reduction.

In the absence of consideration or an agreement under seal, a tenant may be able to fall back on promissory estoppel where they have relied upon a clear representation by the landlord in relation to rent.

While there is insufficient space in this article to consider the principles of promissory estoppel in detail, they are helpfully summarised by Laffoy J in the Barge Inn case as “(a) the pre-existing legal relationship between the parties; (b) an unambiguous representation; (c) reliance by the promisee (and possible detriment); (d) some element of unfairness and unconscionability; (e) that the estoppel is being used not as a cause of action, but as a defence; and (f) that the remedy is a matter for the court.”

Shake your foundations

In the Barge Inn case, the tenant had invested money, time, and effort in a licensed premises, in reliance on a representation that a rent reduction would continue while the tenant’s business was affected by the prevailing economic circumstances.

Laffoy J determined that the equities in the case required the landlord to be restrained from withdrawing the rent abatement while the business continued to be adversely affected by prevailing economic circumstances in the same manner as when the abatement was granted.

The Barge Inn case should be viewed as a cautionary tale by both landlords and tenants. It illustrates how informal rent-abatement arrangements may give rise to significant uncertainty, both as to whether the parties’ legal obligations have been varied, and to what extent.

Such effects can last long after the representations on foot of which they arise, especially where they resulted in a significant change of position by the other party.

Tenants will take note of Laffoy J’s comments on the difficulty of determining how the doctrine applies in the various circumstances that arise and that, in the absence of a significant change of position, a concession made by way of a representation can be withdrawn by reasonable notice. These factors should encourage parties to formalise their arrangements.

Beating around the bush

Clear drafting is key to avoiding uncertainty in future. There are many ways a rent abatement can be structured, but there are some matters that any rent variation agreement should cover.

First, how the obligation to pay rent is being altered should be clearly described. How much will the tenant be obliged to pay? Is it to be a reduction in rent payable, writing-off of arrears, or a deferred due date for rent?

The duration of the arrangement, and the date for resumption of normal rent (or payment of deferred rent), should also be certain. Tying an abatement to economic conditions is best avoided, as the inherent uncertainty may lead to future disputes.

If a fixed date is set, another abatement can always be agreed if economic difficulties persist, but at least the parties will know where they stand.

Alternatively, restructuring the rent provision to link rent to tenant turnover or another performance metric can retain certainty, while allowing for a gradual uplift in rent as the tenant’s business recovers.

Any agreement lasting until the next rent-review date should cover how the agreement will affect the next rent review – will the next review happen as normal, or will the new arrangement take its place? If the latter, what about the review after that?

For older leases containing upwards-only review clauses, consideration should be given as to whether the upwards-only provision is tied to the amount set at the previous review or the amount payable immediately prior to the review date.

If the latter, the landlord should consider ending the abatement shortly before the next review date to ensure a higher floor for the next rent review.

If the payment of rent or any other tenant obligation is guaranteed by a third party, the landlord should take care to ensure that any allowance given to the tenant will not prejudice the enforceability of the guarantee.

If the obligations of a tenant are varied without the consent of the guarantor, in a manner that could possibly be to the detriment of the guarantor, the guarantee will be discharged.

While a simple reduction in the amount of rent that the tenant has to pay is unlikely to discharge the guarantee, other changes, such as deferring the tenant’s liability, may release the guarantor, unless the guarantor consents to the change, either expressly or implicitly – for example, by his involvement in bringing about the variation (see Danske Bank v McFadden).

The most straightforward way to avoid this risk is to have the guarantor co-sign the written agreement or to expressly consent to the variation in writing.  

Alan O’Connor
Alan O’Connor is a practising barrister