Monthly rent arrangements

A practice note on some of the implications arising from a landlord agreeing to accept rent from the tenant on a monthly basis, instead of quarterly.

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Monthly rent payments

Many current commercial leases were granted on the basis that the tenant would pay the annual rent on a quarterly basis in advance. This means that the tenant pays one quarter of the year's rent on each of four specified dates. The traditional quarter days in England and Wales are 25 March, 24 June, 29 September and 25 December. However, it has become increasingly common to provide other quarter days, a frequent alternative being 1 January, 1 April, 1 July and 1 October.

The tenant's problem with quarterly rent payments

Quarterly rent payments can cause cash flow problems for the tenant, who must pay three months' rent in one go. For some businesses, having to find this amount of money can create a substantial financial burden.

A number of tenants have asked their landlords to accept rent monthly, rather than quarterly. In some cases, this was because the cash flow implications of quarterly payments, in tough economic circumstances, could mean that the business was no longer viable. The tenant might be able to fund monthly payments, but having to find three months' rent in advance (possibly on a large number of units) could prove impossible. It was therefore arguably in the landlord's best interest to accept rent monthly, rather than effectively forcing the tenant into insolvency, leaving the landlord with no rent and possibly even a liability to pay rates on the empty property.

In other cases, tenants have objected to quarterly payments simply on the basis that they are "unfair" or old-fashioned arrangements. Understandably, their landlords are less sympathetic to this sort of argument, and often view it as the tenant trying to improve the deal that was struck when the lease was granted.

Monthly rent payments in new leases

It is increasingly common for landlords to agree to monthly rent payments in new leases. However, where a landlord accepts this, it will sometimes increase the annual rent, to reflect the additional administrative costs of the extra payment dates and the fact that it does not get the full rent as quickly as before, which has an adverse impact on the landlord's cash flow.

This practice note considers issues that arise where a lease requires the tenant to pay the rent quarterly in advance, but the landlord agrees to accept rent monthly.

 

Form of the monthly rent arrangement

Typically, where a landlord agrees that a tenant may pay rent monthly, rather than on the quarterly basis set out in the lease, the agreement is reflected in a letter or short agreement. It is possible, however, that the parties will enter into a formal deed that varies the lease.

Waiver

This is probably the easiest way of allowing a tenant to pay rent monthly. The landlord will usually write formally to the tenant, agreeing that it will accept the annual rent payable under the lease in monthly instalments, rather than quarterly. The tenant (and any current guarantor) will normally be expected to sign a copy of the agreement, as an acknowledgement of its terms. For more information, see Third party liability, including guarantors.

This sort of arrangement is usually intended not to operate as a variation, and the agreement may even include an express statement to the effect that it does not vary the terms of the lease. It is also likely that the arrangement will be stated to be personal to the parties to the agreement.

For an example of this approach, see Standard document, Letter permitting tenant to pay rent monthly (www.practicallaw.com/9-384-1198).

Variation

It is open to the parties to allow the tenant to pay rent monthly by varying the lease. The variation could be temporary, and be expressed to apply to a named tenant only, or it might be a permanent change to the way in which rent is paid under the lease. Either way, the parties should be careful to ensure that any changes made to the rent payment dates in the lease do not have undesirable consequences for other parts of the lease, such as the rent review provisions.

Varying the rent provisions of a lease can have an effect for Stamp Duty Land Tax purposes. For more information, see Drafting note, Deed of variation: SDLT (www.practicallaw.com/0-201-1676).

Also, varying the lease could adversely affect guarantees that benefit the landlord. For more information, see Effect of monthly rent arrangements by variation.

 

Ending the arrangement

Change of ownership

The exact terms of the monthly rent agreement will vary, but it is common to provide that the arrangement is personal between the current landlord and tenant. In these circumstances, the agreement will not survive either the landlord or the tenant disposing of its interest in the premises demised by the lease. It may therefore be a good idea to include a provision which makes it clear that the agreement will end if either party disposes of its interest in the lease.

If the parties intend that the monthly rent arrangement will end once the tenant assigns the lease, the landlord should be cautious about allowing the arrangement to continue following a change of tenant (without fresh documents). Similarly, if the monthly rent arrangement is supposed to end when the landlord disposes of the reversion to the lease, the landlord's successor should be careful about letting the tenant pay rent monthly on the basis of the agreement entered into by its predecessor. For more information, see Waiving termination.

The parties might agree that the arrangement should survive a change in ownership, but this is probably best done by a formal variation to the lease, rather than in a supplementary document or letter.

Underletting

While it is not a matter that directly affects the relationship between the landlord and the tenant, the landlord may also draft the monthly rent agreement so that it ends if the tenant underlets the demised premises (or part of them).

An undertenant might not be able to pay quarterly rents or it might be paying less than the rent passing under the headlease. Either situation could leave the tenant with cash flow problems if it has to revert to paying rent on a quarterly basis. However, it is always open to the tenant to enter into a new agreement with the landlord, if both parties are willing to continue with monthly rent payments.

Landlord's power of termination

It is also quite common for the landlord to reserve the right to end the monthly rent concession. The terms on which it can terminate the arrangement are a matter of negotiation, but the landlord will normally want as few restrictions on this ability as possible. Often, the only requirement will be that the landlord gives notice of termination to the tenant. Other possible conditions on the exercise of a power to end the monthly rent arrangement include:

  • That the notice does not have immediate effect, giving the tenant time to find any sums due when the rent reverts to a quarterly basis.
  • That the landlord may only end the arrangement if the tenant's profits (or turnover) exceed a certain level. This might be tied solely to the figures for the demised premises, or could relate to the accounts for the whole of the tenant's business.
  • That the monthly rent concession can only be ended on, or after, a particular time (perhaps after a year, or on a date that allows the tenant to resume quarterly rent payments without it potentially having to find a large sum immediately).

It seems likely that a landlord will only agree to such restrictions if it is getting something extra from the tenant in return or if the tenant is in a very strong negotiating position.

Termination on breach

The landlord may provide that the concession will end automatically if the tenant fails to observe the terms of the agreement allowing monthly rent payments or it fails to observe any of the tenant's covenants in the lease. This sort of provision will remind the tenant that monthly rent payments are a concession granted by the landlord, and may help to encourage a tenant to comply with the lease, in spite of its financial difficulties.

Are there pitfalls if there is an automatic termination on breach of the agreement or lease?

Automatic termination for a breach of the agreement or the lease may cause problems. The landlord might not be aware of the breach. It will not always be clear exactly when the breach took place, which in turn means that it might be difficult to know when the monthly rent arrangement ended. If the landlord is aware of the breach, and is willing to allow the tenant to carry on paying rent monthly without a fresh agreement, the landlord runs the risk of being treated as waiving the breach, which could have undesirable consequences. For more information, see Waiving termination.

If landlord has a general power to end the monthly rent arrangement, should an additional provision be incorporated to end on breach?

If the landlord has a general power to end the arrangement whenever it likes, then there might be no point in including a further provision dealing with termination for breaches. However, the landlord might still like the agreement to remind the tenant that it has the benefit of a concession and that the other terms of the lease, and of the agreement itself, are still to be followed. Also, the landlord might provide that different types of interest calculation apply, depending upon how the rent arrangement ended. For more information, see Charging interest.

End of a set period

The parties may agree that the monthly rent concession shall apply only for a certain amount of time, for example, one year from the date of the agreement. If the parties wish to continue the arrangement once the period has ended, it would be safest for the landlord to prepare a new agreement, rather than treating the old one as continuing.

Payments due on termination

When the monthly rent arrangement ends, the landlord will usually want:

  • Any outstanding sums cleared.

    For example, if the tenant has paid two months' rent out of a quarter when the arrangement terminates, the landlord will want the balance of that quarter's rent paid.

  • Interest paid on that balance (see Charging interest).

Charging interest

The interest could be charged from a number of different points:

  • The date on which the quarter's rent was due under the terms of the lease (the preceding quarter day).
  • The date of the event, or notice, that terminated the monthly rent arrangement.
  • A set period after the date of the event, or notice, that terminated the monthly rent arrangement.
  • The date on which a particular party to the agreement becomes aware of an event that ended the arrangement.
  • A set period after the date on which a particular party to the agreement becomes aware of an event that ended the arrangement.
  • Some other date notified by the landlord to the tenant. This date is unlikely to be wholly within the landlord's discretion, and will probably be related to an event that led to the end of the monthly rent arrangement.

Usually, the agreement will require interest to be calculated at a default rate (higher than a base interest rate). A default interest rate will often be specified in the lease, and this could be adopted in the monthly rent agreement. However, the parties could set a different rate. For more information on interest provisions in leases, see Practice note, Leases: Interest (www.practicallaw.com/5-422-4485).

Basic interest provisions or detailed ones?

The landlord may decide that it is better to keep things simple, and opt for just one of the possible alternatives for calculating interest, which will apply irrespective of how the arrangement comes to an end. However, it might be fairer and more logical to provide for different points from which interest is payable, depending upon how the monthly rent concession ends.

For example, where the arrangement ends because the tenant assigns the lease, it is arguably fair to require the tenant to start paying interest from the date of the assignment. The tenant has control over when the assignment takes place, and knows that the monthly rent concession will end at that point. The tenant could therefore arrange to pay any balance owed to the landlord on that date, and so there should be no need for it to incur any interest charges.

For an example of a "basic" interest provision, see Standard document, Letter permitting tenant to pay rent monthly (www.practicallaw.com/9-384-1198). For a more detailed approach to calculating interest, see Standard clause, Letter permitting tenant to pay rent monthly: alternative interest provisions (www.practicallaw.com/7-500-9577).

The choice of date from which interest is payable might have implications for whether or not a guarantee is affected by the monthly rent arrangement. For more information, see Third party liability, including guarantors.

 

Waiving termination

Where the monthly rent arrangement ends automatically on a specific event (such as the landlord disposing of the reversion to the lease or the tenant breaching the terms of the agreement), the landlord (or new landlord) might be tempted to allow the tenant to carry on paying rent monthly.

This is a highly practical and pragmatic approach. However, there is a risk that, by ignoring the fact that the agreement has ended, and treating it as continuing, the landlord might create problems for itself. The issue can be avoided by:

  • Minimising the number of events that automatically terminate the monthly rent arrangement.
  • The landlord refusing to accept monthly rent payments once it is aware that the agreement has ended. The landlord and tenant can always enter into a new agreement.

If the landlord is aware that the agreement has ended, but still allows the tenant to pay rent monthly, it runs the risk of:

  • Being estopped from treating the monthly rent arrangement as ended at a later date. See Estoppel.
  • Varying the terms of the agreement by conduct. See Varying the agreement.
  • Varying the terms of the lease by conduct. See Varying the lease.

Estoppel

If the landlord knows that the agreement should have ended, but it allows the tenant to carry on paying rent monthly, the landlord might be estopped (www.practicallaw.com/5-201-8307) from later treating the agreement as ended by the event in question (and possibly even future events of a similar nature).

As usual with any form of possible estoppel, the position will depend upon the particular circumstances, and the behaviour of both the landlord and the tenant will be relevant.

Where the landlord can end the monthly rent arrangement at any time, it is unlikely that the estoppel argument will cause problems for the landlord.

Varying the agreement

If the parties treat the monthly rent agreement as continuing, in spite of knowing that an event has brought the arrangement to an end, it could be construed as:

  • An implied variation of the agreement, which prohibits the landlord from terminating in respect of the particular event.

  • A variation of part of the agreement so that the part in question no longer operates.

For example, a monthly rent agreement specifies that the arrangement will end if the tenant breaches the terms of the lease. The landlord becomes aware of such a breach, but allows the tenant to continue to pay rent monthly. The landlord might not be able to treat the agreement as ended at a later date for that breach. The tenant might go further and argue that the terms of the agreement have been varied, so that no other breaches of the lease (or at least breaches of the same type) would end the monthly rent arrangement.

The landlord might not be too worried if it loses the ability to terminate the monthly rent arrangement for a breach of the lease, if it still has the power to end the concession in some other way, such as a general power to end the arrangement at any time.

Continuing the arrangement with successors in title

Most monthly rent arrangements will be a concession granted by a particular landlord to a particular tenant, and not intended to bind (or benefit) either party's successors in title. If the landlord were to treat the arrangement as continuing after the tenant had assigned the lease (or if the landlord disposed of its reversion, and the new landlord carried on with monthly rents), then this might be taken to vary not only the specified termination events, but also the statement that the agreement was personal to the parties.

If the monthly rent agreement allows the landlord to end the arrangement at any point, then a change to some other terms of the agreement is unlikely to cause a problem. However, if the landlord is happy to allow the tenant to carry on paying rent on a monthly basis, it would be safer for it to enter into a fresh arrangement with the tenant, rather than acting as though the original agreement is still in force.

Varying the lease

While the common law position is that a deed is required to vary another deed, equity allows a variation to be effected without a deed, if consideration (www.practicallaw.com/3-107-5984) is given. For more information, see Practice note, Execution of deeds and documents (www.practicallaw.com/0-380-8400).

It might therefore be possible to vary a lease by conduct, even if the lease were created by deed. This could occur if the parties to a deed establish a pattern of behaviour that contradicts a term of the deed (although consideration might be required).

For example, a variation by conduct might arise if a tenant is allowed to pay rent on a monthly basis, instead of quarterly as required by the lease, and the concession is expressed to be personal to that tenant. If the tenant were to assign the lease, and if the landlord allowed the new tenant to carry on paying rent monthly (without a fresh agreement), there could be an argument that the parties have varied the lease to allow monthly rent payments.

This sort of situation seems more likely to give rise to an estoppel or a variation of the terms of the agreement itself, than to a variation of the lease, but it is best to avoid potential arguments. The landlord may also be keen to avoid any chance of reducing (or ending) the liability of a guarantor, a former tenant or a former tenant's guarantor by varying the lease. For more information, see:

 

Rent reviews

In some cases, a rent review will conclude while a monthly rent arrangement is in place. Even in a poor market, there might still be an increase in rent on review. The actual terms of the lease and the monthly rent arrangement must be taken into account, but where a review concludes on time, there is unlikely to be any confusion as a result of the monthly rent arrangement.

If, however, a review concludes late, and the rent rises as a result, the landlord must consider the effect of the monthly rent arrangements on sums the tenant might be obliged to pay as a result of the review. For more information on rent reviews in general, see Practice note, Rent and rent review (www.practicallaw.com/2-328-1954).

Where the rent payable under the lease increases following a late review, the landlord will usually look to the tenant for two different sums:

  • The shortfall between the rent actually paid by the tenant, and the rent that would have been paid, had the review concluded on time (see Shortfall).
  • Interest on that shortfall (see Interest).

Shortfall

Many leases specify that, while a rent review is outstanding, the tenant is to continue to pay rent at the rate that applied before the review date. For example, the Standard document, Lease of whole (www.practicallaw.com/6-107-5020) states:

"If the revised Annual Rent has not been agreed by the Landlord and the Tenant or determined by the Surveyor on or before the relevant Review Date, the Annual Rent payable from that Review Date shall continue at the rate payable immediately before that Review Date."

If the review leads to an increase in the rent reserved by the lease, the tenant will have to pay the landlord the extra rent (or shortfall) that would have been paid, had the review concluded on time.

Example

  • The annual rent reserved under a lease is £60,000, payable quarterly in advance on the first days of January, April, July and October.
  • The landlord and the tenant have agreed a monthly rent arrangement under which the rent is payable on the first day of each month.
  • A rent review is due on 1 January 2008 (the review date), but the parties cannot agree the level of rent that should be paid.
  • The tenant continues to pay an annual rent of £60,000.
  • The review concludes on 1 January 2009, and the annual rent increases to £72,000, with effect from the review date.
  • The tenant owes the landlord £12,000, a sum equal to the difference between the rent actually paid in 2008 and the rent that would have been paid in that period, had the review concluded on time.

Usually, leases provide either that this shortfall must be paid on demand (although of course it cannot be demanded until the result of the review is known) or that it will be paid once the review concludes. The tenant might be allowed a short period of time in which to pay the shortfall. For example the Standard document, Lease of whole (www.practicallaw.com/6-107-5020) states:

"No later than five working days after the revised Annual Rent is agreed or the Surveyor’s determination is notified to the Landlord and the Tenant, the Tenant shall pay:
(a) the shortfall (if any) between the amount that it has paid for the period from the Review Date until the Rent Payment Date following the date of agreement or notification of the revised Annual Rent and the amount that would have been payable had the revised Annual Rent been agreed or determined on or before that Review Date..."

Does a monthly rent arrangement affect when the shortfall payment is due?

The precise wording of the lease will have to be considered in each case, but typically a monthly rent arrangement will not affect when the shortfall payment is due. It will not normally matter over what period the shortfall arose; once the sum is due, the tenant must pay it on the date set out in the lease.

It is, however, possible that the date on which the shortfall is due under the lease will be affected by the monthly rent arrangement. For example, the lease might require that any shortfall be paid on the next rent payment date, which would normally be one of the quarter days. The parties would have to consider if the terms of the monthly rent arrangement mean that the shortfall is due on the next monthly payment date or on the next quarter day.

What is the exact period in respect of which the shortfall is calculated?

There might also be some question as to the exact period in respect of which the shortfall is calculated.

Example

  • The annual rent reserved under a lease is £60,000, payable quarterly in advance on the first days of January, April, July and October.
  • The landlord and the tenant have agreed a monthly rent arrangement under which the rent is payable on the first day of each month.
  • A rent review was due on 1 January 2008 (the review date), but the parties cannot agree the level of rent that should be paid.
  • The tenant continues to pay an annual rent of £60,000.
  • The review concludes on 10 January 2009, and the annual rent increases to £72,000, with effect from the review date.
  • The lease states that, when the review concludes, the tenant is to pay any shortfall in rent from the review date to the next rent payment date.

Does the tenant pay the shortfall due up to the next rent payment date specified by the lease (1 April 2009) or only up to the next monthly payment date (1 February 2009)?

Strictly, there is only a shortfall if rent has been paid at a rate lower than it should have been. The exact wording of the lease and the monthly rent agreement will have to be considered, but the latter interpretation (1 February 2009) seems fairer, and more in keeping with the deal struck by the parties. If, for some reason, the landlord wants to be certain that it can claim for an amount up to the next quarter day, even though it is currently accepting rent monthly, it should include some specific wording to this effect in the monthly rent agreement. If the parties decided that the former interpretation should apply, the monthly rent document could deal with this expressly, but it seems unnecessary.

Interest

The date on which the tenant must pay any shortfall that has arisen from a late rent review is likely to be fairly easy to determine. However, the position in respect of any interest that is payable on that shortfall might not be so clear.

Most leases with rent review provisions will include a clause that allows the landlord to claim interest on any shortfall arising from the late conclusion of a review. For example the Standard document, Lease of whole (www.practicallaw.com/6-107-5020) states:

"No later than five working days after the revised Annual Rent is agreed or the Surveyor’s determination is notified to the Landlord and the Tenant, the Tenant shall pay:
(a) the shortfall (if any) between the amount that it has paid for the period from the Review Date until the Rent Payment Date following the date of agreement or notification of the revised Annual Rent and the amount that would have been payable had the revised Annual Rent been agreed or determined on or before that Review Date; and
(b) interest at the Interest Rate on that shortfall calculated on a daily basis by reference to the Rent Payment Dates on which parts of the shortfall would have been payable if the revised Annual Rent had been agreed or determined on or before that Review Date and the date payment is received by the Landlord."

Leases usually provide that, while a rent review is outstanding, the tenant is to carry on paying rent at the same rate as it did before the review date. This means that, where a rent review concludes late, leading to a rent increase, the tenant has benefited by paying a lower rent than it would have done had the review concluded on time. The tenant could have used that shortfall to pay off loans, earn interest in a bank or for any other purpose. Conversely, while the review was outstanding, the landlord did not have the benefit of the uplift in rent. If the tenant has to pay interest on the shortfall, this compensates the landlord for receiving the additional rent late.

Also, if the tenant did not have to pay interest on any shortfall, it would have an incentive to stall the conclusion of a rent review, especially where the review is upwards only.

The tenant can only pay the shortfall once the rent review has concluded, so interest on the shortfall is normally charged at a lower rate than the interest the tenant pays where it is in breach of the terms of the lease. However, the lease may provide that, if the tenant does not pay the shortfall when it is due, the late payment will be subject to interest at a higher "default" rate. For more information, see Practice note, Leases: Interest (www.practicallaw.com/5-422-4485).

Usually, interest on the shortfall will be based on the additional amount of rent that should have been paid on each rent payment date.

  • Example
  • The annual rent reserved under a lease is £60,000, payable quarterly in advance on the first days of January, April, July and October.
  • A rent review was due on 1 January 2008, but it concludes on 1 January 2009, resulting in the annual rent increasing to £72,000.
  • The shortfall sum due is £12,000 (the difference between the new and old rents for one year).
  • The interest is calculated as follows:
    • One year's interest on £3,000 (one quarter's additional rent), which would have been payable on 1 January 2008, had the review concluded on time;
    • nine months' interest on the next £3,000 (calculated from 1 April 2008);
    • six months' interest on the next £3,000 (calculated from 1 July 2008); and
    • three months' interest on the final £3,000 (calculated from 1 October 2008).

If the landlord had agreed that the tenant could pay rent on a monthly basis during that year, would the interest on the shortfall be calculated on a monthly basis?

If this were the case, this would mean that the tenant would have to pay one year's interest on the first £1,000, 11 months' interest on the next £1,000, and so on.

The answer might not be readily apparent, even after an analysis of the wording in the lease and the terms of the monthly rent arrangement. However, it seems reasonable that the landlord should only be able to claim interest on each month's shortfall, for the period where the monthly rent arrangement operated. Had the review concluded on time, the landlord would have received only one month's instalment of the rent at the increased level on each monthly payment date.

If the landlord accepts that interest will be calculated monthly, then there is no real need to cover the point specifically in the monthly rent agreement. The tenant might feel more comfortable if express wording is included, in case the landlord changes its position later.

If the next review is some time off (in particular if it is not due until after the monthly rent arrangement should have ended), or if a review is imminent (or even overdue) and it seems likely that there will be no increase in the annual rent as a result, then again there is arguably no need for the monthly rent agreement to cover the interest point specifically. Again, there might be some merit to including an express provision, putting the issue beyond doubt.

 

Third party liability, including guarantors

It is quite common for someone else to be potentially liable for the current tenant's breaches of the lease. This liability can arise in a number of ways:

  • When the current tenant took the lease, the landlord required a guarantee that the tenant would observe the terms of the lease.

  • A former tenant remains liable because the lease was either an old lease for the purposes of the Landlord and Tenant (Covenants) Act 1995 (LTCA 1995), or was a new lease, but the former tenant was not released following an assignment.

  • A former tenant of a new lease remains bound by an Authorised Guarantee Agreement (www.practicallaw.com/8-107-6453) (AGA).

  • A former tenant's obligations remain guaranteed (because either the lease was an old lease or the lease was a new lease, but the tenant's obligations were not released on assignment).

  • The LTCA 1995 might not prohibit someone from guaranteeing the former tenant's obligations under an AGA. If that is correct, such a guarantor could be ultimately liable for the current tenant's breaches. For more information, see Guarantors, former tenants and their guarantors.

In many cases where a tenant asks if it can pay the rent on a monthly basis, this will be because it is in financial difficulty (or is trying to avoid getting into such difficulty). It is in those circumstances that a landlord is most likely to have to call on guarantors or former tenants, and it will not want to discover that it has lost its rights to pursue them for the tenant's breaches of the lease.

The landlord could refuse the tenant's request to pay rent monthly. In many cases, however, it will suit the landlord to keep the premises open and trading, and maintain a good relationship with the tenant.

Where the guarantee is worth relatively little, the landlord is likely to be more relaxed about the risks of losing the benefits of the guarantee. For example, the guarantor's assets might be worth less than they were when it entered into the guarantee or it might be suffering from the same financial problems as the tenant.

Effect of monthly rent arrangements by waiver

There is little modern authority on the effect on a guarantor or a former tenant of a waiver or personal concession given to a tenant. This is in contrast with the law relating to variations of an underlying obligation, where the effect on guarantees has been considered a number of times.

It may be the case that, where a landlord agrees to a tenant paying rent monthly, as a waiver of the strict terms of the lease, there is no effect at all on a guarantee or on a former tenant's liability. However, there are some steps that the landlord can take to reduce any possible argument that the waiver operates as a release from liability:

Terms of the guarantee

It is established law that a variation to an agreement, which gives a party whose obligations have been guaranteed additional time to pay, can affect the guarantor's liability.

Most modern guarantees (including AGAs) include a statement that the guarantor's obligations will not be affected by the landlord giving the tenant further time to pay sums due under the lease. Where there is no variation to the terms of the lease (express or implied), this statement may be enough to ensure that a guarantor is not released from its obligations merely because the landlord has agreed that the tenant may pay the rent monthly, instead of quarterly. Where there is a variation, this wording may help the landlord, but it is not necessarily conclusive.

The landlord should also check to see if any relevant guarantees (including an AGA) contain provisions stating that the liability of the guarantor will not be affected by a future variation of the lease. A guarantee may also state that it is a guarantee of the lease "as it may be varied in the future". Provisions of this sort are generally thought to be effective only for minor variations to the lease.

It is not clear to what extent that type of clause matters when the landlord allows the tenant to pay rent monthly by a waiver, rather than by varying the lease (expressly or impliedly). However, seeing this wording in a guarantee document will give additional comfort to a landlord.

Waivers and variations

The dividing line between a variation to an agreement and a waiver may be fine. A concession given by one party to a contract (including a lease) to the other may be a waiver, or a variation, depending upon the circumstances. One factor that indicates that a change to the underlying agreement is a variation, rather than a waiver, is consideration (www.practicallaw.com/3-107-5984) for the concession. For example, if the landlord were to agree to monthly rent payments, but seek to charge an increased rent, or an "administration fee", this might suggest that the arrangement was a variation.

It is not clear to what extent the express terms of a monthly rent arrangement could counteract that suggestion. For example, if the agreement states that it is a waiver, is personal to the named landlord and tenant and the landlord can end the monthly rent arrangement at any time, could the arrangement still be viewed as a variation?

There is an additional factor that might assist landlords who do not want to vary the lease inadvertently: the common law principle that a deed is required to vary another deed. Most leases are created by deed. However, in equity a contract contained in a deed can be varied other than by deed, if consideration is given. For more information, see Practice note, Execution of deeds and documents: Releases and variations (www.practicallaw.com/0-380-8400).

To be as safe as possible, a monthly rent agreement that is intended to operate as a waiver should:

  • Expressly state that it operates as a waiver.
  • Make no provision for the tenant to give any consideration in return for the waiver.
  • Include clear wording that allows the landlord to terminate the arrangement unilaterally.
  • Be entered into under hand and not as a deed.

For information on the possible problems of varying the lease, see Fair terms.

Fair terms

The general law provides that contracts of guarantee are construed strictly against the person in whose favour they are made. Guarantees are subject to many technical rules that can result in the release of the guarantor from all liability. One thing that can result in the release of a guarantor is a variation of the underlying contract.

The basic rule is that a guarantor will be released from all liability under its guarantee if:

  • The underlying contract is varied;
  • The variation is binding on the person(s) whose liability the guarantor has guaranteed; and
  • The guarantor does not consent to the variation;

unless the variation is clearly insubstantial or self-evidently will not prejudice the guarantor (Holme v Brunskill [1878] 3 QBD 495 and Metropolitan Properties Co (Regis) v Bartholomew [1996] 11 EG 134).

For more information, see Practice note, Variation of guaranteed obligations (www.practicallaw.com/7-228-2952).

A personal monthly rent arrangement that is intended to operate as a waiver should not give rise to a variation of the underlying contract (the lease). However, the landlord will usually want to take all reasonable steps to reduce or eliminate any chance of releasing a guarantor. One way of doing this is to make sure (as far as possible) that the monthly rent arrangement cannot be viewed as prejudicing a guarantor.

How a guarantor might argue that the monthly rent arrangement has prejudiced it

A guarantor might argue that the monthly rent arrangement is prejudicial to it because the landlord has:

  • Allowed the tenant to get deeper into financial difficulties by giving the tenant additional time to pay and has consequently increased both the chances of the landlord having to call on the guarantee and the amount for which the guarantor is liable.

  • Exposed the guarantor to greater interest payments where the guarantor is expected to cover interest on outstanding sums calculated from the original payment date.

    By allowing the tenant to delay rent payments, the guarantor might end up liable for more interest than if it had been approached as soon as it became clear that the tenant would struggle to pay the quarter's rent.

How a landlord might respond to the guarantor's arguments

The landlord could claim that, by agreeing to accept monthly payments, it at least got one or two months' rent for the quarter from the tenant and that, without this, the guarantor would have been liable to pay the whole quarter's rent. This counter-argument is strong, but it still might not be sufficient to satisfy the Holme v Brunskill test of not being prejudicial to the guarantor.

While the guarantor's argument that it has been exposed to greater interest payments is perhaps a little tenuous, it is probably best to eliminate it by providing that, even if the tenant is in breach of its obligations under the lease or monthly rent arrangement, interest will only start to run from the date of the breach (or later).

Personal arrangement

It is possible for a monthly rent arrangement, made in a side letter between a landlord and tenant, to bind a successor in title, where the agreement is not expressed to be personal to both parties. If the monthly rent arrangement binds, say, the landlord's successor in title, this possibly increases the chance of the arrangement being regarded as a variation of the lease. In turn, this increases the risk of the monthly rent arrangement adversely affecting a guarantee.

To minimise this risk:

  • The monthly rent agreement should be stated to be personal to both the current landlord and the current tenant.
  • The agreement should expressly state that the monthly rent arrangement will end if either the landlord or the tenant disposes of its interest in the lease.
  • The landlord should not treat the arrangement as continuing if the tenant assigns the lease. Similarly, a new landlord should not carry on with a monthly rent arrangement agreed by its predecessor in title. In either case, the landlord and tenant can always enter into a fresh monthly rent agreement.

A failure to do any (or all) of these things will not necessarily mean that a guarantor or former tenant will be released from liability. However, if the landlord thinks it might need to pursue a guarantor or former tenant at some point, it should do all it can to reduce the chances of accidentally releasing them from their obligations.

Guarantor's agreement

The safest option for the landlord is to get the current tenant's guarantor (as opposed to a former tenant who has given a guarantee in an AGA, or a former tenant's guarantor) to sign the document that effects the monthly rent arrangement, accepting its terms.

Standard document, Letter permitting tenant to pay rent monthly (www.practicallaw.com/9-384-1198) includes a provision for a guarantor to sign.

Former tenants and their guarantors

Where a personal monthly rent arrangement takes effect as a waiver, there is arguably no need to involve a former tenant or a former tenant's guarantor. However, the landlord might still consider seeking a former tenant's consent to the monthly rent arrangement, or at least informing it of the agreement. While contacting a former tenant may be comforting to the landlord, the time and effort involved in seeking a former tenant's approval (let alone the consent of a former tenant's guarantor) seems disproportionate to any possible risk of release.

If the agreement varies the lease, then a former tenant, or former tenant's guarantor, might be released (see Fair terms), but the LTCA 1995 means that there is no point in seeking their consent to the change (and indeed there may be risks if the landlord tries to do so). For more information, see Guarantors, former tenants and their guarantors.

Effect of monthly rent arrangements by variation

It is well established that a guarantor can be released by a variation to the underlying obligations it has guaranteed. For more information on the general law, see:

The usual approach should be to obtain the guarantor's consent to any variation to the lease, where possible. While a variation allowing the tenant to pay rent monthly, rather than quarterly, might satisfy the test in Holme v Brunskill, it is much better to get the guarantor to agree formally to the changes, and minimise the possibility for future argument.

Section 18 of the LTCA 1995 contains provisions that relate to the treatment of former tenants and their guarantors, where the lease is varied. These provisions will be relevant wherever a former tenant, or the guarantor of a former tenant, remains potentially liable for a breach of a lease covenant. For more information, see Guarantors, former tenants and their guarantors.

Guarantors, former tenants and their guarantors

Section 18 of the LTCA 1995 relates to variations of leases, and applies to both old and new leases.

Under section 18 of the LTCA 1995, former tenants, and their guarantors, are not liable to pay any amount to the extent that the amount is "referable" to a "relevant variation" made after the tenant has assigned the lease. A relevant variation is a variation of the lease in respect of which the landlord has an absolute discretion to withhold its consent. Section 18 applies in addition to the general law on the release of guarantors.

Before 1995, original tenants were potentially liable for any breaches of the lease throughout the term, even where liability arose in respect of a provision that had been varied after the original tenant had parted with the lease. Section 18 of the LTCA 1995 dealt with this potentially unfair situation.

However, before the LTCA 1995 came into force, Friends' Provident Life Office v British Railways Board [1995] 48 EG 106 and Metropolitan Properties Co (Regis) v Bartholomew [1996] 11 EG 134 were decided by the Court of Appeal. These cases concerned the effect on a former tenant (and its guarantor in Metropolitan Properties) of variations made to leases after assignment. In essence, the Court of Appeal found that the former tenant could not be made liable for more than it had bargained for originally, but on the facts the former tenant (and guarantor in Metropolitan Properties) remained liable as though the covenant had not been varied.

The effect of section 18 of the LTCA 1995 depends upon whether the lease is a new lease or an old lease for the purposes of the LTCA 1995.

New leases: A guarantor of a new lease will be released when the tenant whose liability it is guaranteeing is released (section 24, LTCA 1995). A tenant is released when it assigns its interest in the lease (section 5, LTCA 1995) unless the assignment is an excluded assignment (which is, broadly, an assignment by operation of law or an assignment without consent). In that case, the tenant (assignor) and its guarantor will be released on the next assignment that is not an excluded assignment. So, in relation to a new lease, a guarantor will only be a guarantor of a former tenant if there has been an excluded assignment.

Some commentators think that the LTCA 1995 did not prohibit someone from guaranteeing the former tenant's obligations under an authorised guarantee agreement. If that is correct, such a guarantor could also be a "former tenant's guarantor" for the purposes of section 18.

Old leases: A guarantor of a tenant under an old lease might have agreed to guarantee that tenant's assignees as well. Even if the guarantor did not, it might have indirectly guaranteed the liability of assignees anyway. This is because, under certain circumstances, a former tenant of an old lease may become liable for breaches of covenant carried out by later tenants. Once the tenant assigns its interest in the lease, its guarantor becomes a guarantor of a former tenant, and is therefore affected by section 18.

Section 18 in practice

Section 18 of the LTCA 1995 does not contain any provision that allows a former tenant (or a former tenant's guarantor) to consent to be bound by a variation. In view of the anti-avoidance provisions of section 25 of the LTCA 1995, it is arguable that any attempt to bind a former tenant by a variation of the lease will be void, even if the former tenant is happy to agree to, and join in with, the variation.

Before a landlord agrees to enter into a monthly rent agreement, it should consider the effect of variations on the liability of previous tenants (and their guarantors, if any remain). In practice, a landlord might be more concerned with the current tenant than previous ones, although a landlord might want to be able to claim money from a previous tenant, should the current one be unable to meet its obligations under the lease. However, because of the strict anti-avoidance provisions of the LTCA 1995, there may be little that a landlord can do to prevent section 18 operating if a "relevant variation" is made to the lease.

Section 18 of the LTCA 1995 does not relieve a former tenant of all liability whatsoever for a lease: the former tenant is only released from liability to pay amounts referable to a relevant variation effected after the assignment.

However, it may be difficult to work out the extent to which a previous tenant's liability to pay outstanding sums is "referable" to the variation. For example, if a lease is varied to allow the current tenant to pay rent monthly, the tenant makes the first payment, then fails to pay the rest of the quarter's rent, to what extent is a former tenant liable for the balance and any interest payable on it? In one sense, these sums would have been due under the lease in any event, but it is also arguable that the (reduced) payment is referable to the monthly rent arrangement.

The safest option is to make sure that, as far as possible, a previous tenant (or the guarantor of one) is not prejudiced by the monthly rent arrangement. For this reason, landlords are likely to prefer tenants to pay rent monthly by some form of waiver of the obligations in the lease, rather than by varying the lease.

Even if the parties decide on an express variation of the lease to allow for monthly rent payments, keeping the current tenant trading in the property might be more important to the landlord than a hypothetical risk of letting a former tenant escape liability. This is especially true as it is far from clear that a variation permitting monthly rent payments would have an adverse effect on a former tenant's liability.

Where the former tenant remains potentially liable only under an AGA, then the effect of a monthly rent arrangement on that guarantee should also be considered.

Section 17 procedure

A landlord may end up asking a former tenant (or a former tenant's guarantor) to pay sums due under the lease. The landlord must follow the procedure specified in section 17 of the LTCA 1995 in order to claim money from a former tenant (or its guarantor). For more information on section 17, see Legal update, Liability of former tenant for rent following review (House of Lords): Restriction on recovery of rent and service charge (www.practicallaw.com/5-383-8188).

Drafting a section 17 notice

If the landlord has to serve a default notice under section 17 of the LTCA 1995, it must set out the dates on which the sum claimed was payable. Where a lease specifies, say, quarterly rent payments, but the landlord has allowed the tenant to pay monthly instead, the landlord must use the right date in the section 17 notice.

In many cases, monthly rent payments will be permitted by some form of waiver that is personal to the tenant, as with Standard document, Letter permitting tenant to pay rent monthly (www.practicallaw.com/9-384-1198). For that sort of concession, the section 17 notice should probably refer to the rent payment dates set out in the lease, not the monthly dates specified in the letter. Also, if the landlord is considering serving a section 17 notice, it will usually have terminated the monthly rent payment arrangement (assuming it did not end automatically once the tenant failed to make the payments due).

Generally, a former tenant's liability should not be affected by a purely personal arrangement made between the landlord and the tenant. However, the precise wording, and effect, of each particular arrangement should always be checked. Two separate concession letters in the same form could conceivably have different effects, depending upon the wording of the leases to which they relate.

A monthly rent concession effected by a variation to the lease is more likely to affect the drafting of a section 17 notice than a concession that operates as a waiver. However, this will still depend upon exactly how the lease was amended, and the variation might make no difference to a section 17 notice.

When drafting a section 17 notice that covers a period where the landlord allowed monthly rent payments in spite of the terms of the lease, do not forget to deduct any monthly rent payments that the tenant has made from the amounts claimed by the section 17 notice.

Serving a section 17 notice

A section 17 notice must be served within six months of the date on which the sum fell due. This is likely to be the date on which the lease specified that the rent was payable, rather than the date of a missed monthly instalment, but again the terms of the monthly rent arrangement must be considered closely.

 
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