Dentists may be open but their landlords may still be in pain

25th June 2020

Dentists began to treat patients again from 8 June, often after months of very limited income. The closure of many practices in lockdown has affected their landlords too; indeed, dentists who have sold their practices have frequently found themselves with a double hit, as they have often retained their property as a source of investment income following the sale, and are now landlords to their buyer.

Since lockdown, many landlords are now finding that their dentist tenants are demanding rental holidays or changes to payment terms and many are unsure how to respond. It can be particularly frustrating where the dentist has continued to receive income during the lockdown period because their practice is substantially funded under an NHS Contract.

Whilst landlords may not want to accept the proposal presented to them, it is important that they understand that they do have options available. Any proposal made should not be ignored (even if it will be refused) because silence could lead to uncertainty between the parties and a risk that terms have been inadvertently accepted by virtue of the conduct of the parties.

Legal remedies

Before a landlord decides how to proceed, it is helpful to consider the formal remedies available:

  • It could forfeit the lease. Forfeiture for non-payment of rent has been suspended at the moment in line with government guidelines. However, if there are other breaches, such as unlawful alterations or unlawful subletting, these could still be relied upon. That said, if a recession is likely to follow lock down, forfeiture would not be recommended because some income in the short term is likely to be better than an empty unit. In addition, the landlord will become liable for the business rates once the empty rates relief expires after three months.
  • Use the rent deposit. This is only a short term remedy because a deposit is unlikely to be more than three months’ rent, but could provide some immediate cash flow.
  • Pursue the guarantor. The lease will set out any pre requisites that are required, but often the landlord has freedom to choose to recover a debt from a tenant or a guarantor, and subject to the relationship between the two, the guarantor could be a better recovery option.
  • The government has also revised this remedy and it now only applies to a debt equivalent to 90 days’ arrears rather than seven. However, it is often a difficult remedy to use because it is limited to pure rent, not insurance rent or service charge, and it can be unclear how much of the equipment is owned by the tenant rather than leased.
  • Sue for the arrears. This remedy needs to be proportionate, so suing for arrears of one month would not be proportionate, but six months may well be. Interest and costs could be included in the claim, but it is likely to take six to nine months before a court order is obtained as hearings are proceeding remotely and at a slower pace than before.

In considering these options, the most important questions to consider are 1) whether you want to try to continue the landlord and tenant relationship and if you do 2) do any of the remedies discussed suit your purposes? If not, then it would be sensible to look to negotiate a middle ground.

Negotiation options

If a tenant is proposing not to pay their rent for six months, or to switch from payments in advance to payments in arrears, there are a number of considerations to bear in mind including whether the landlord accepts the offer made. Often a tenant will enclose a letter to sign and return regarding the proposal, but that may not set out the detail required to protect the landlord’s position.

Key considerations are:

  • When will any missing sums be repaid? Will it be in one payment or in small increments and over what period?
  • Is interest going to be payable? (either now or later)
  • If a turnover rent is proposed, what information will be shared to ensure transparency?
  • If there is a guarantor, the landlord must ensure that they aren’t inadvertently released if they haven’t been consulted about the changes
  • Is the landlord retaining their ability to use all of their contractual remedies in the lease if the tenant is unable to satisfy the new arrangement (I.e. if the tenant’s cash flow doesn’t improve)?
  • Are there any sub tenants or licensees? If so, what will the impact of the changes be upon them?

Once the landlord is clear about the terms they want to agree, they will need to document those changes in the form of a side letter or a deed of variation. There isn’t a ‘one size fits all’ resolution to this and legal advice should be taken to ensure that the appropriate method is used. The risk otherwise is that the landlord could inadvertently waive rights. The scope and scale of the changes, and the length of time that they are intended to be in play, will also have a bearing. The landlord should also consider if the change is going to be personal to the tenant and if they want to have the freedom to bring the arrangement to an end or not. Finally, the terms agreed could have an impact upon future rent reviews and the landlord will need to ensure that this is avoided.

Most leases provide for the tenants to bear the landlord’s reasonable costs when making an application for consent. The wording in some leases is wide enough to cover situations such as these and so the landlord should also consider if the tenant should be bearing the costs of the documentation required.

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