The lack of clarity and support for landlords and tenants during the pandemic has led to tense relationships between both parties, with the pressure to make payments too much for some businesses to take. With many bills remaining unpaid and businesses on both sides continuing to fall into arrears as the next rent quarter fast approached, it was clear something had to change.
Reopening of ‘non-essential’ retail last week is providing some welcome financial respite. Initial reports suggest a strong first trading week, but with reduced footfall and social distancing measures in place, retailers are still facing a shortfall – estimations are that FY21 will be c.20% below 2019 levels. As hospitality begins to open its doors from 4th July, and the change to a one metre+ rule, it will be interesting to see how those in that industry fare in their first week.
The Government’s code of practice, released late on Friday 19th June, was hoped to provide new relief for those who have been worst hit, including those in the retail and hospitality industries. However, for many it has not been the signal of support they were hoping for.
The code sets out several issues to consider when negotiating any new arrangements between landlord and tenant, including the provision of financial information to justify the concessions. All parties are encouraged to act in good faith as economic partners, not opponents, with four key principles set out:
- Transparency and collaboration: the parties should act reasonably, swiftly, transparently and in good faith
- A unified approach: help and support each other in all dealings with other stakeholders to achieve outcomes reflecting the code’s objectives
- Government support: recognise that government support has been provided to help businesses meet their commitments, which includes the payment of rent
- Acting reasonably and responsibly: to operate reasonably and responsibly, recognising the impact of COVID-19, in order to identify mutual solutions where they are most needed
Advice on practical options have also been provided, with suggestions on monthly rent and service charges, rent free periods, deferments, waiver of interest, variations and re-gears. The Code was developed in close collaboration with retail industry trade bodies and reflects the ongoing negotiations in the industry.
As a key example, reports have suggested that retailers, including Fraser Group, Ryman, Pret A Manger, New Look and now All Saints, are negotiating the possibility of switching to turnover-only based rents. This represents a major change, as although most leases provide for turnover, it is usually linked to substantial base rents, which protect the landlord’s investment value. A true turnover-only rent, which these companies have requested, will create an incentive for the operator and owner to work together to make it a success.
Whilst this code may prove helpful as a guide, the fact remains that none of these options are new and the indication is that the government expects those in the retail and hospitality industries to come to their own arrangements voluntarily.
Of more immediate help is the proposal to extend the moratorium on forfeiture of leases until the end of September. This will give the industry some vital breathing space to try and agree new arrangements. However, it remains to be seen what will happen if they cannot do so, and further legislation may be required to prevent operators using the insolvency regime to restructure leases. We have already seen Go Outdoors enter into a pre-pack administration and sale and Pret A Manger and Leon appoint restructuring advisors.
Just this week we have seen serious warnings from shopping giant Intu, which suggest administration could be as imminent as next week. If a contingency plan is not reached, possible closure of major shopping centres such as the Trafford Centre, in Manchester, could bring about further irreparable damage to the recovery of the retail industry.
To ensure the collective survival of our high streets it is imperative that level heads prevail and involved parties avoid knee jerk reactions, instead seeking reconciliation rather than further conflict.
Clear communication and transparency will prove decisive. Both tenant and landlord should keep a thorough record of conversations, ensure diligent financial book-keeping and maintain transparency wherever possible. Whilst this new code of practice may not be the financial life ring many hoped for, it could prove a valuable reconciliatory resource for conversations between tenant and landlord.
As we reach the latter stages of lockdown being lifted and other commercial businesses begin to return, it will be interesting to see what lessons are learned from the frontlines of retail. With the trend towards home working, there is a possibility many will not return, and landlords will have to work closely with their remaining tenants, as taking stock from this most recent course of action, further financial support policies appear unlikely.
Stephen Crook, partner and commercial real estate specialist, BLM