Covid-19 lockdown: rent deferral and concession options

Because Natasha’s beauty salon was classed as a ‘non-essential’ business when lockdown commenced, she was forced to close her business premises until the government said otherwise. 

Clearly, this meant that her income stream stopped, but not her ongoing rental obligations under the terms of the governing lease.

Not surprisingly, Natasha contacted our SIPP Property Team to explain that she would not be able to pay the rent for the time being, and asked what options were open to her. 

Fortunately, via their monthly “Pension Schemes Newsletter”, HMRC had set out a number of easements to their normal rules and requirements, in the light of the coronavirus pandemic.

One of these easements was the ability for a tenant of a commercial property to defer the payment of rent for a three month period; by which time it was hoped the lockdown would have had a positive impact on pandemic infection rates.

A member of our Property Team discussed this option with both Natasha and the connected landlord. It was therefore agreed that the payment of rent would be deferred until the end of June 2020.

Given the two parties were connected, however, and ever alert to the possibility of a future HMRC audit of the transactions undertaken between themselves, our Property Team produced a written ‘concession agreement’ that would run alongside the existing lease, for both parties to sign and date. 

This would ensure that all parties understood what had been agreed, as well as creating an audit trail for any future third party review.

In early July, our Property Team proactively contacted Natasha to inform her that HMRC had extended the rental deferral easement for a further three months. Although some commercial entities were gradually being allowed to reopen, beauty salons needed to remain closed. So it was agreed that the rental deferral period would continue for another three months.

The dates on the ‘concession agreement’ were therefore updated and the written document circulated to the connected parties for signing and return.

Although August saw an upsurge in hospitality via the “Eat Out to Help Out” initiative, beauty salons were still unable to open. Natasha knew that the deferred rental payments remained due, and contacted our SIPP Property Team to ask about repayment plans.

We informed her that when the deferral period ended, either the deferred rent could be paid as a one-off lump sum, or a repayment plan could be established.

However, as the opportunity to reopen her business grew nearer, it became clear that Natasha could not pay the outstanding rent that was due, as well as recommence the regular rental payments.

The only viable option, therefore, was to write off the six months of unpaid rent and effectively create a rent free period for Natasha.

For an unconnected landlord and tenant, a rent free period may constitute a sensible commercial agreement between the two parties; for example, to enable the tenant to remain in place, as opposed to being left with an unoccupied property.

For connected parties, however, additional written evidence underpinning the rent free period will be required for the SIPP provider’s audit trail.

In Natasha’s case, this took the form of a letter from her accountant to our SIPP Property Team, explaining that the absence of trading over the six month period had made payment of the deferred rental amount unaffordable. The accountant’s letter stated that, in their opinion, a rent free period for those six months represented the most viable option.

This was agreed between the various parties and again - for audit trail purposes - was confirmed in writing, signed and dated. Regular rental payments then recommenced when the beauty salon was allowed to open again.