LANDLORD TENANT CONCESSIONS

The Government has announced that commercial tenants who cannot pay their rent due to coronavirus will be protected from eviction as a result of missed rent payments over a period of at least 3 months. Many landlords and tenants are already discussing temporary arrangements to help tenants cope with the impact of Covid-19 on trading.

It is important that landlords and tenants are cognizant of the tax impact of any such concession arrangements. Whilst the impact on corporation tax/income tax will likely be limited in the case of deferral only arrangements (as they are based on accounting accruals as opposed to cash payment), there may be significant VAT and SDLT (England), LBTT (Scotland) or LTT (Wales) implications.

SIDE LETTER ARRANGEMENTS

Many such arrangements will simply be documented by way of side letter without any express variation to the terms of the existing lease and provided that the agreements are personal to the landlord and tenant (i.e. would not bind a successor-in-title), they should not have any SDLT, LBTT or LTT implications.

There may be an impact on VAT accounting – particularly where rent has been invoiced up-front but payment deferred. However, that is likely to be smoothed in most cases by the measures allowing for deferral of VAT payments in the short term. Where invoiced rent is forgone completely, a credit note can be issued to cancel the landlord's VAT liability.

FORMAL CHANGES TO LEASE ARRANGEMENTS

Arrangements which involve an actual variation of the existing lease – particularly those involving (in England and Wales) an extension of the term or (anywhere in the UK) an express surrender of the existing lease and replacement with an alternative lease need closer consideration. Tenants entering into arrangements such arrangements need to be careful to ensure they do not incur an additional SDLT, LBTT or LTT cost on "overlap" rents.

Particular concerns can arise for certain types of properties – for instance, a surrender and new lease (and potentially also, in England or Wales, an extension of the term or demise under the lease) of a care home or certain types of student accommodation might result in a prohibitive VAT liability for the landlord where this occurs within 10 years of practical completion of the building.