As you may have seen in the press, some tenants, particularly retail tenants, are asking landlords to accept monthly rather than quarterly rent payments. As a consequence, lenders may be receiving requests from borrower landlords for consent to amend the terms of leases to allow monthly rent payments.
In considering such requests, lenders will need to consider the following issues:
- facility documentation for UK loans usually assumes that three months rent is paid in advance on the quarter dates in an amount sufficient to fund three months of interest and any amortisation on the next interest payment date (which is usually a week or two later). Will accepting monthly rent payments still leave the borrower with sufficient cash to meet its debt service obligations? It may be appropriate to require a rent deposit to cover the prospect of a "missing" two months rent. Payment mechanics will need to be checked and amendments may need to be made to reflect the new arrangements;
- managing agents may only be required to sweep cash to the lender's charged rent account once a quarter. Any managing agent and duty of care agreements should be checked and, if necessary, amended to ensure the managing agent is required to sweep collected rents more frequently;
- financial covenants should be checked to ensure monthly rents do not have any adverse impact or require any amendments to the basis of testing; and
- whether any change to monthly rent payments should be made on a temporary or permanent basis, and what impact the change will have on the value or the validity of any rent guarantee.
For details of additional property issues arising from a change to monthly rent payments click here for our recent Real Estate bulletin