Negotiating Rents With Landlords

By Adrian Burke

This article appeared in the April 2010 edition of Futura Magazine, you can read the original article here.

Due to the obvious effects of the credit crunch (cash flow scarcity) many tenant companies are now left with no option but to seek to re-negotiate leases with their landlords in order to secure a reduced rent and the actual future of their business. Up until the end of 2007 the rental market was on a steep upward curve in terms of rents being achieved on new lettings and on rent reviews and as such most tenants are now having to dealing with rental payment obligations which are no longer in line with the (reduced) turnover being achieved by the business which is operated out of the premises.

Irrespective of the economic climate or the tenant’s inability to pay, where a tenant seeks legal advice as to whether there is any way to force the landlord to reduce to rent or to avoid paying it altogether (where the landlord has in no way breached his obligations) the strict legal advice will generally be the same: ”a lease agreement between two parties represents a binding commitment by the tenant to pay the agreed rent for the agreed term of the lease and unless there is provision contained in the lease agreement to the contrary there is no obligation on the landlord to enter any form of negotiation concerning the rent much less actually reduce it”.

However the business environment has and is continuing to evolve past the previously strict black and white legal advice with tenants attempting to do whatever it takes to survive. Increasing numbers of landlords are having to deal with their lenders and are viewing “some rent” as being better than “no rent”.

Where a tenant has begun to fall behind on the rent and is in such financial difficulty on all fronts of the business that an insolvency situation is a real possibility, every solicitor would advise that notwithstanding the binding nature of the rental commitments, the tenant (or his advisors) should approach the landlord and make him understand the tenant’s perilous financial ill health and the limited value (in the present cash flow sensitive times) of the landlord’s legal remedies against the tenant for breach of the lease if the tenant actually goes into liquidation.

Where a situation like the above occurs both the tenant and the landlord need to be aware of their respective legal positions whilst at the same time having a realistic expectation of what is commercially acceptable/achievable in the present market.

Obviously the commercial specifics of each situation will differ depending on whether the situation concerns a small tenant in a single unit or a large retail multiple renting 20 units spread around the country and also whether the landlord is a large institution or an individual who has a single commercial investment property forming part or all of his/her retirement/pension plan. The location and age of the relevant premises are also important factors; is the premises located on the main shopping street of a large city or is it in a recently built shopping centre on the outskirts of a small town? Are the tenant and/or the landlord relatively new companies or have they long established businesses (i.e how strong are their respective balance sheets)?

In addition to the commercial factors which will go into the mix in any possible discussion regarding changing the rental terms of a lease, the legal options available to (and the legal restrictions on) both parties will also be extremely important in influencing the decision making process of both parties. The tenant needs to understand the legal options that will be available to it where it has to deal with its insolvency and how that procedure will affect the landlord. Likewise the landlord needs to know what can be done, from a legal enforcement point of view, when a tenant falls behind on rent (or stops paying it completely) and more importantly what is the effect of a tenant going into liquidation

Whilst it may go against the spirit of compromise upon which the discussions are based, knowing the lengths/limits (and commercial effect) of what the other party can do is extremely important in calibrating your expectations as regards what is achievable irrespective of whether you are the tenant or the landlord.

The Tenant’s Options

From the tenant company’s side, where the rent has fallen into serious arrears and/or the company itself is in terminal financial difficulties the options are as follows:

• The tenant can physically return the keys of the premises to the landlord thereby informally surrendering it. However unless the landlord accepts the keys (by acknowledgement or course of action) this method is far from certain in terms of effecting an end to the tenant’s liability for the rent going forward;
• The tenant company can be placed (by resolution of its shareholders) into a creditors voluntary liquidation.  The rental obligations towards the landlord will rank as unsecured debts and will only be paid pro-rata with all other unsecured creditors after all preferred/secured creditors (e.g employees/Revenue Commissioners/secured parties) have been paid. It is normally the case that a creditors voluntary liquidation is commenced where a shortfall between the company’s assets and liabilities exists and as such the landlord will be aware that if such an event were to occur he will not be getting 100% of what is owed to him under the liquidation procedure;
• A tenant company can apply to the Courts to be placed in examinership with a view to asessing whether there is a viable business which could continue on if certain court sanctioned cost reducing measures were allowed to be taken. In recent examinership cases before the courts, companies have been allowed (where it is shown to be vital to the survival of the overall business) to repudiate certain onerous contracts including property leases whether the landlord agrees or not;
• The decision as to what to do may be taken out of the hands of the tenant company where a liquidator is appointed as a result of an application by a creditor of the tenant company. The liquidator so appointed has the power under certain legislation to disclaim a lease held by the company in respect of a premises where the liquidator shows that it is onerous. ¹

The Landlord’s Options

From the landlord’s perspective where a tenant (in arrears with rent or otherwise) has asked for a rent reduction or worse still has asked for the landlord to take back the property (by surrender or re-assignment), the landlord needs to know what his legal options are.

• The landlord can go to court to get a judgement in respect of arrears of rent. Upon getting the judgement the landlord can have it enforced against the assets of the tenant company. Judgement can also be sought simultaneously against any person(s) who gave a guarantee of the tenant’s obligations under the lease. This exposes the tenant company’s (and any guarantor’s) assets to potential seizure in order to satisfy the landlord’s judgement. However at present the time required to get a court date and have your claim heard can be upwards of four months. Even where a judgement is granted in the landlord’s favour for the full amount of outstanding rent, the translating of the judgement into real cash is yet another procedure to go through and is ultimately dependent on whether the tenant company has any free/unsecured assets which can satisfy the judgement;
• (The landlord can go a step further than mere debt collection proceedings as set out above. An application can be made to the High Court to have the tenant company wound up on the grounds that it is unable to pay it’s debts (i.e. the unpaid rent). This procedure will, if successful, result in the company ending up in the same position as referenced at (iv) in the tenant’s options above. However if the tenant company is being disingenuous in its pleas of inability to pay the rent (i.e. the tenant is just using the recession as a smoke screen to increase profits through rent reduction) the prospect of the tenant company being wound up and all assets taken into the full control of a liquidator will normally cause the tenant company to think twice about progressing with its non-payment of rent activities/rent reduction requests. The tenant company’s accounts as filed in the Companies Registration Office will be available to anybody who wishes to look at them.
• An entitlement (derived from the provisions of most written leases and the relevant Landlord & Tenant legislation) to retake physical possession of the property can be exercised by the landlord. It depends very much on the individual circumstances of each landlord whether this option is attractive. Where there might be some form of demand for the premises in the rental market, the substantial arrears of an existing tenant may present an opportunity to get a stronger tenant in or rent the premises for a longer term. It should be noted that a landlord is not acting illegally if (after taking possession of the premises, whether by agreement or through forfeiture) he rents it at a lower price to the next tenant.

Obviously the landlord and the tenant will only decide on their ultimate course of action based on one or other of the above options after any negotiations between them have run their course. However having a full understanding of what you can do (whether you are the tenant or the landlord) will obviously colour the negotiations which occur between the parties.

The practical solutions which are coming out of negotiations these days are very simple and understandable given the economic environment. Rent reductions or postponements of rent for a specific future duration in consideration of removal of break options or extension of the term are common. One very common proposal being put to landlords is the replacement of a fixed monetary amount as a rental payment to a figure derived from a calculation based on turnover of tenant or the tenants business in the relevant premises. Also some landlords are taking surrenders of property in consideration of lump sum payments from tenants. This can have near term benefits for the landlord and long term benefits for the tenant in saving the tenant business.

At the end of the day in the present environment “compromise” is the catch word for both tenants and landlords.

This information is a very brief overview of the law pertaining to landlord and tenant law and should not be taken as definitive legal advice.

Adrian Burke is the managing partner of Adrian Burke & Associates Solicitors. He advises clients on a wide range of commercial issues including the renegotiation and enforcement of commercial leases. Adrian Burke & Associates is a full service corporate law firm based in Fitzwilliam Square, Dublin 2. For more information contact 01 665 0436 or e-mail info@adrianburke.ie.