Newmanor-care-home-thumb

How to formalise a temporary rent reduction in a care home setting

Authors

Clodagh Wright
Clodagh Wright
Edmund Barnes
Edmund Barnes

How to formalise a temporary rent reduction in a care home setting

Following the devastating number of deaths in care homes as a result of the pandemic, it is sadly not surprising that some care home business tenants are struggling to pay their rent. If you are a landlord of a care home and have been contacted to discuss rent reductions, this article will help you as we explore the key terms to be agreed with your tenant and how such requests can be formalised.

What are the key terms to agree with your tenant if they request a rent reduction?

As part of the negotiations, you should discuss:

How can you formalise a temporary rent reduction?

You will likely have a lease in place with your tenant. One option is to agree to vary the terms of the lease using a deed of variation.

What are the advantages and disadvantages of using a deed of variation?

What if you require your tenant to take on additional property, substituted property or reduce the amount of property it leases as part of the negotiations?

  1. You can enter into a separate lease of the additional property if you require your tenant to take on additional property.
  2. For your tenant to take on substituted property, you can enter into a surrender of part of the existing lease and a supplemental lease of the additional property. Remember, you need to consider the existing care home residents in this situation.
  3. It is better to use a combined surrender of part and variation of the existing lease if you require the tenant to reduce the amount of property it leases. Same consideration as above applies here too.

The above must not be done using a deed of variation. Doing so can extinguish the existing lease and automatically regrant a new one, which can create unintended consequences…

  1. If your tenant does not currently have a right to a new lease when it ends because the procedure known as excluding security of tenure was followed, the procedure will not apply to the regranted lease, which may result in your tenant acquiring a right to remain at the property.
  2. There are issues around liabilities on any assignment of the regranted lease if the existing lease was granted before 1996 – the regranted lease will be a new lease and so your tenant will usually be released on an assignment but the regranted lease will not contain modern assignment provisions that are typically included in a new lease.
  3. There are also potential issues for your tenant, such as compulsory registration of the regranted lease at the Land Registry and how they deal with any mortgages over the extinguished lease.

What if you require your tenant to take a lease extension in return for the temporary rent reduction?

You do not need to wait until the existing lease has expired. Instead, you can enter into a lease with your tenant now which takes effect when the existing lease expires – this is  known as a reversionary lease. This prevents your tenant from walking away at the end of the existing lease.

The main limitation is that the start date for the new lease must not begin more than 21 years after the date it is granted. Further, though more a concern for your tenant, the new lease must be registered at the Land Registry even if its duration is 7 years or less where the start date is more than 3 months after it is granted.

Our experience

We recently helped a landlord based overseas successfully document its care home tenant’s request for a reduction in rent using a deed of variation. Like most transactions, there has to be some give and take, and so in return for the rent reduction, we included provisions to increase the annual rent by a fixed percentage each year or by reference to Earnings before Interest, Taxes, Depreciation, Amortization, Rent and Management Expenses (EBITDARM). We also helped the landlord grant a 5 year lease to the tenant which takes effect when the existing lease expires in 2035 – so the landlord now has greater certainty of income over a longer period time. A fair bargain we would say.

Interestingly, we completed the entire transaction electronically, which sped up the deal and made for a smoother and more convenient signing process for our overseas client. The Land Registry accept certain electronically signed documents now but you must make sure that their requirements are met – you can read more about this on our Insight’s page here.

Please be aware though – you and any existing lender should communicate early on any plans to formally document your tenant’s request for a rent reduction, otherwise you may experience delays. We needed to obtain consent from two separate overseas lenders, and although consent from the junior lender was easy enough to obtain, the same cannot be said for the senior lender, which took a bit more time – the senior lender made the grant of the consent conditional on completion of the refinancing with the landlord and the revaluation, which inevitably delayed matters.

Another point to look out for is that your tenant may also take the opportunity to seek to include other provisions in their favour, the acceptance of which depends on the bargaining power of the parties.

We are here to help

The experienced team here at Newmanor Law, specialists in commercial property legal advice, have the knowhow to assist landlords in the care home sector. Please speak to Karen Mason, on +44 (0)20 7464 4081 or email karen.mason@newmanor.com to find out more.