Practical Approach to Rent Rebate Agreements

Due to the stress in the business environment created by the ongoing COVID-19 pandemic, tenants have sought to renegotiate their lease deeds with the landlords. Our law firm, Leslie & Khettry has assisted many of our clients in renegotiating rentals. We share some tips on the approach that can be adopted by the parties in renegotiating rentals.

In our experience, most of the rent renegotiation has taken place because there is genuine stress faced by the tenants. In some cases, however, we note that where large corporates are involved, they have also managed to renegotiate rentals even though it does not form any significant portion of their operating expenses. This is in order to protect their cash flows in times of uncertainty and perhaps taking advantage of the situation as it allows them to approach the landlords on the pretext of the current scenario.

A tenancy usually of a period of one year and above involves a written agreement referred to as a lease deed. This may be structured simply through a monthly rent with escalation of rent clauses built in or in various other ways such as a mix of revenue / turnover of total sales plus a fixed amount of monthly rent.

On the other hand, a tenancy can be a monthly tenancy with meagre rent amounts which in most cases is usually a protected tenancy. Such tenancies are governed by the rent control legislations of the particular state.

It is presumed that the parties are willing to renegotiate. Some points to consider and keep in mind while renegotiating rents:

• The negotiating power between the parties depends to a large extent on various factors such as whether there exists a lock-in period, is there a force majeure clause which includes government action / lockdown or epidemic / pandemic, other factors such as location of the property, use of the property (i.e. whether the tenant’s business was under the category of essentials and hence functioning all through the lockdown – such as banks, telecom or media companies), how deep are the pockets of either of the parties.

Readers may see that many of the contributing factors are non-legal in nature, as essentially, it’s a private arrangement between the parties.

• Where the landlord is GST registered, in order to grant future rebate, it is compulsory to enter into an agreement (preferably written) as per GST laws prior to the commencement of the rebate period. Therefore, any discounting of the rent should be backed by a written agreement before the commencement of rebate.
• The landlord should also get adequate GST related indemnity built into the rent rebate agreement from the tenant.
• Some options to consider:
• If the ability of the tenant to pay rent is temporarily affected, a simple deferment plan can be agreed to between the parties.
• Usually landlords keep a 3 or 6 months’ interest free security deposit from the tenant. If the cash flows of the tenant are temporarily affected but not the ability to pay future rent, the parties may consider adjusting the temporary non-payment of rent from the interest free security deposit. The adjustment of a portion of the interest free security deposit against the rent would reduce the landlord’s safety net, however it will also reduce their future liability. In case of tenants, this would ease their cash flow, however it does not affect their profitability.
• Rather than going for a complete waiver, it may be better to opt for discounted rent spread over a period of time so that the cash flows of the landlord are also not affected as they also bear property tax, maintenance, operating and other expenses.
• Landlords should ensure that the termination notice if any, according to the lease deed is not given during the rebated rent period. In addition, landlords may negotiate for a corresponding increase in the lock-in period for the waiver / discount period.
• In case the tenant does not agree to an increased lock-in period, the landlord may press for a contingency clause that should the tenant decide to terminate the lease deed during the remainder period, the entire discounted / waived amount shall be repayable.
• Parties should ensure clarity on how the rent escalation clause in the main lease deed will work once the waiver / discount period is over, such as the time from which the escalation will take place and the base rent for escalation.
• Landlords should also be careful not to negotiate any terms so as to bring the tenant under the protection of rent control legislations. For this they should see the applicable laws in their respective state.

Depending on the negotiating strength of the parties, many other clauses can be discussed such as undertaking not to seek future rebates, increased lock-in periods, resolution of existing / ancillary disputes and costs.