The issue of commercial rent payments has become increasingly pertinent in recent years, with large tenants such as Monsoon paying its rent on a monthly basis. The British Retail Consortium actively supports monthly payments and in March 2012, several of the Property Managers Association’s national retailer members signed an open letter to landlords in favour of monthly rents.
Calls to break with tradition
There has been long-standing sentiment among tenants that the quarterly system, which was historically structured around religious festivals and landlords travelling to collect rent on horseback four times a year, is antiquated and unrealistic.
The main disadvantage of quarterly rent payments from a commercial tenant's perspective is one of cash-flow. The requirement to pay 3 months' rent in one lump sum in advance can be extremely onerous, particularly in the current economic climate with tougher trading conditions. Increasingly the financial burden of quarterly rent payments impacts on the viability of tenants' businesses, as was the case with Woolworths.
In general, landlords have proved unsympathetic to arguments that the quarterly system is outdated, and have been suspicious of tenants attempting to negotiate more favourable terms than those originally agreed. The most obvious reason for this reluctance to deviate from the quarterly system again relates to cash flow.
The switch to monthly payments is likely to impact on a landlord's own obligations, such as debt repayments or rent to a superior landlord. Landlords may even need to obtain consent from a superior landlord or lender before agreeing to alter the rent payment structure.
In particular, landlords should check any loan facility arrangements as these often require interest to be paid on a quarterly basis. Landlords may face difficulties persuading banks to alter this payment structure. Landlords may also suffer additional costs as a result of billing, collecting and monitoring rent on a monthly basis.
A look ahead
It is arguably in the best interests of landlords to accept monthly payments to avoid forcing tenants into insolvency and suffering the consequential problems of no rental income and rates on vacant premises. Equally, adopting a flexible approach makes commercial sense in terms of cementing relationships with tenants.
Although monthly rent payments remain in the minority, the balance appears to be shifting and the British Property Federation has amended precedent leases to enable monthly rent payments. Given the uncertain economic future, tenants' demands are unlikely to quieten. With side letters offering an attractive alternative to permanently amending the terms of the lease, can landlords refuse to give in to tenants' demands for flexibility?