Tenants and landlords: Collaborative solutions in tough times

The detrimental effects of COVID-19 have and continue to be a uniquely difficult time for both commercial tenants and landlords. The British Property Federation (BPF) alongside its landlord members are working with retail, leisure and hospitality tenant businesses in distress together with other tenants affected by an immediate loss of revenue following the lockdown. Landlords continue to offer flexibility around rent and lease terms, including rent deferrals and payment holidays which will be increasingly important to tenant businesses given the time that will be required for trading to resume over the coming months.

However, landlords themselves face their own difficulties. Retailers have suggested that landlords should grin and bear the fluctuations to their rental incomes and adjust their financial expectations accordingly. In many cases, this is not a simply short-term deferral of rental payments, but an insistence that landlords agree to a full write-off of a quarter’s rent. A number of retailers have sought agreement to no rent being paid until such time as a unit reopens, so not limiting any rent deferment to just one quarter, and then once trading resumes requesting reduced rental terms, with some tenants asking for no base rent - instead proposing small turnover rents.

Tenants should be aware that service charge is a direct cost to landlords and if tenants fail to pay that places further financial strain on landlords’ resources. While there are areas where costs can be reduced (e.g. marketing) there will be essential services that will need to be maintained during the closure of a shopping centre including security, insurance and to a degree the provision of cleaning in the current environment if essential retail units remain open.

Under Section 82 of the Coronavirus Act 2020 landlords have limited powers to challenge non-payment of rent and instigate forfeiture action until 30 June 2020. The Act and additional legislation does not prevent landlords from:

• deducting payments from rent deposits
• accruing interest on unpaid sums
• potentially pursuing any guarantor.

On 23 April 2020, the government also announced a temporary ban on the use by landlords of statutory demands (made between 1 March 2020 and 30 June 2020) and winding up petitions presented from 27 April 2020 through to 30 June 2020, where a tenant cannot pay its rent liabilities due to Covid-19. The legislation, which seeks to ensure that a tenant’s financial position does not worsen, is due to be included in the Corporate Insolvency and Governance Bill.
Under the recently introduced measures, any winding-up petition that claims that the tenant is unable to pay its debts must first be reviewed by the Court to determine the circumstances. The law will not permit petitions to be presented, or winding-up orders made, where the tenant’s inability to pay is as a result of COVID-19. The new legislation is in force until 30 June and may well be extended together with the moratorium on commercial lease forfeiture.
Legislation is also due to be brought forward to prevent the use of the commercial rent arrears recovery process (CRAR) unless 90 days or more of unpaid rent is owing by the tenant.
Tenants should be mindful that any deferment or rent holiday does not result in the rent being written off and landlords may still look for full payment at a later date.

It is not just landlords that are affected by non-payment of rent and any subsequent impact on commercial property values, but also those that rely on income provided by real estate funds, specifically pension investors. As it stands, around £12.7bn of funds are suspended in an array of property funds, which are currently closed to withdrawal requests on liquidity grounds. There is no certainty as to when this position will change. * source Financial Times 20th March 2020

A unique crisis

Landlords undoubtedly recognise the scale of the problem: the retail sector was already under pressure before the Covid-19 crisis hit, a combination of the structural decline in the high street and changing consumer preferences. The enforced lockdown has pushed many struggling businesses close to insolvency. Turnover disappeared overnight and staff have been furloughed. In extreme cases, tenants have entered into administration (Carluccios & BrightHouse) and there will be additional pressure on those businesses that agreed Company Voluntary Arrangements with their creditors over the last 24 months.

Online sales have increased but some stakeholders are saying it procurement centres cannot be safely staffed. The fashion retailer Next temporarily suspended its online offering before re-instating the offering with a daily order limit for safety reasons.

Where retailers and other tenants are experiencing financial difficulties, some landlords may feel an obligation to support proposals from tenants. Landsec has been proactive in establishing an £80m rent relief fund for its food and beverage occupiers and small businesses with £15m of support for its F&B tenants (which equates to an estimated three months of rent) and the remaining £65m to be allocated on a case-by-case basis to small and medium-sized business tenants.

However, a too aggressive approach by tenants may lead to the creation of lingering tension, particularly if tenants experience a significant bounce-back in sales and profitability once the lockdown measures are relaxed. It may seem a long way off today but there may be considerable pent-up demand, resulting in increased spending when life returns to a degree of normality, fuelled by mortgage holidays, holiday repayments and insurance claims.

Collaboration

We would urge landlords and tenants to work collaboratively at this sensitive and fast-moving time. Tenants should not take too short a view or risk acrimony developing that will impact the relationship when ‘normal business’ resumes. A pro-active, open and consensual discussion should find a workable solution for both parties. Tenants should consider and, if time and resource afford them, to prepare certain information to support any proposal that they wish landlords to consider:

• Lease term & contractual rent (including turnover rent)
• Current agreement in place i.e. monthly payments, other concessions
• Details of any enforcement history i.e. CRAR
• Rent deposit held
• Guarantor
• Forecast profit and loss (per landlord site)
• Assumptions made in relation to the impact of Covid-19
• Relief available and sought under the Coronavirus Financial Support Schemes
• Cost of conforming with Covid-19 requirements i.e. domiciliary care providers - extra personal protection equipment, staffing, supply chain costs, insurance, security
• Level of support being sought from the landlord
• Support, if any, that a tenant’s shareholders will be providing (this will be important if a landlord sees that dividends have been paid);
• Capital and interest holidays sought/agreed with the tenant’s funders
• Time to pay and deferral arrangements sought/agreed with HMRC

Many of these should be obvious: tenants should not be trying to obtain significant rent concessions while continuing to pay all other stakeholders. Landlords should not be the first port of call to help finance a struggling business. Equally, there should be scope for negotiation on sharing the potential benefits of any sudden improvement in trading and overriding market conditions.

Landlords should be sympathetic in cases of genuine distress, but they will need to feel they are being treated fairly. Equally, tenants in distress should not feel that landlords are pushing them closer to insolvency. The relationship between landlords and tenants is symbiotic: each benefit when the other is performing well.

If you need any assistance in renegotiating the terms of any leases, either as landlord or tenant, please do not hesitate to get in touch. We can assist with a collaborative solution that works for both parties. Also, the current protective legislation is due to expire on 30 June, 6 days following the next rent quarter date – 24 June. We appreciate that there are many ‘fires to fight’ at present but time will pass quickly before the rent becomes that significant fixed cost to deal with again.

Government and Tax legislation, sourced from HMRC and gov.uk, is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice from their financial adviser before making financial decisions.

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DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.