Economical Rent

In business tenancy law, the actual tenant’s ability to afford the rent at review is generally considered irrelevant. So, the actual tenant faces a dilemma, because - unless the review goes to ‘arbitration’ - the tenant must decide what rent to agree and no tenant will willingly agree more than they can afford. Since affordability is a big issue, solicitors acting for tenant-retailers can encounter difficulties in obtaining instructions when the client is at a loss to know what to do.

It is vital the tenant understands the review process. When premises are offered to let in the open market, as well as negotiating the best deal it can, a tenant will do one or both of two things. All tenants decide whether, on their projected figures, the rent would be affordable. The second thing, which is not something all tenants do, is to check whether the proposed rent is realistic, compared with what other tenants nearby pay for their premises. Ascertaining what others pay for their premises helps avoid a hike in the rental benchmark, which can happen if the transaction were cited as evidence for nearby reviews. With shop property, for example, the Zone A value could destabilise the cost of the trading position for those retailers whose established presence is one attraction of the position in the first place. Few tenants care about the wider long-term consequences of their business expansion plans and most are single-minded. Some deliberately pay top rents to ingratiate themselves with landlords, whilst others agree what they can afford at the time, expecting future rent reviews also to be based on affordability.

As soon as the lease is completed, affordability and business tenancy law part company. At rent review, it is assumed the actual tenant can afford, pro-rata, the same as everyone else, because the purpose of a review is to enable the landlord to receive the market rent. However, although each new letting reflects that particular tenant’s affordability, the profit margin and rate of stock-turn mean not all tenants can afford the same as everyone else. Furthermore - and this point is frequently overlooked - because rent is payable regardless of the profitability of the business, it is assumed the tenant is of independent means, even though most tenants rely entirely on business cash-flow.

Although retailers in trouble are managing to persuade landlords to accept rents paid monthly, a growing number of retailers that are not in any difficulty are expecting the same treatment.

Some landlords can afford to be accommodating, but many cannot. Landlords that themselves are borrowing money are likely to be paying their interest quarterly, so accepting rents monthly from the tenant will mean the landlord subsidising the tenant. 

In any event, such an arrangement, where it is a departure from the terms and conditions of the lease, should only be temporary, and subject to notice to end the arrangement if the landlord should so desire. Landlords should also put the agreement in writing, in a side-letter with the lease, setting out clearly the terms and conditions of the arrangement. 

To avoid problems should the landlord want to sell the investment, the arrangement should be personal to the tenant and landlord and non-transferable. 

In my opinion, the investment value of a property where the tenant is being allowed to pay monthly could well be lower than where payments are quarterly.