Unlocking the impasse between tenants and landlords
High street businesses and, consequently, commercial landlords have faced an immense amount of pressure over the last year.
The government has stepped in to help businesses through its various support schemes, code of practice and legislation that prevented landlords from evicting tenants. However, these have not always been able to ease the challenges faced by landlords and have only been temporary fixes. The government knows this legislation cannot continue indefinitely and are calling for evidence on the best way to withdraw these measures whilst protecting businesses. Our CEO, Richard Kleiner, responds with his views on the measures that have been in place this year.
I have thought for some time that the words echoed by Boris Johnson at the beginning of the lockdown, “We are all in this together”, are inspiring and true. But now we need an upgrade, along the lines of, “We should all get out of this together”.
What I mean by that, particularly with regard to the leisure and hospitality sector, is to make sure that tenants and landlords both come through this current malaise as unscathed as possible and accept that it is going to take some years to fully recover. To that end, it is important that, for the next 6-12 months, both tenants and landlords remain as cash neutral as possible. Whatever losses have been incurred to date should hopefully be dealt with through the various government support schemes, including the Coronavirus Business Interruption Loan (CBILS).
Commercial Rents and COVID-19 Call for Evidence
I read recently that there was a new objective of the government to gather more evidence to fully understand how landlords and tenants are responding to the build-up of rent arrears that has occurred as a result of businesses being unable to trade normally during the Covid pandemic. One hopes that the gaining of this evidence will lead to more insightful legislation to bridge the inevitable gaps that currently appear and are incapable of being resolved between landlords and tenants. The objective must be that for businesses that were profitable before the pandemic to fail as a result of rent arrears due to the inability to trade normally for the last 12-15 months will be sorted out as a result of the long awaited legislation. Let’s hope that it is only a matter of weeks, rather than months before such legislation appears.
For more information about the call for evidence, click here.
Government’s Code of Practice in support of high street businesses and landlords
The government published a code of practice last year for the commercial property sector. The code encouraged landlords and high street businesses to work together to protect each other.
Whilst the efforts of the government are to be applauded, the absence of the banking community from the discussions was stark and clearly must be included to ensure that landlord obligations to their funders are also taken into consideration in a collaborative and transparent way.
Rishi Sunak commented, “We continue to work with lenders to ensure flexible support is provided to commercial landlords, including payment holidays and restructuring facilities, and it is right that where landlords receive support, they extend this to their tenants.” I support this statement, but also believe landlords whose tenants are unable to fulfil their rental obligations should, in turn, receive support from their funders, which will allow them to accept lower payments in meeting their ongoing obligations.
Whilst I appreciate that the code of practice will be temporary in nature, it is crucial that it is in place for long enough to enable the high street to recover. One particular area that will need to be addressed is to what extent any underpayments, sometimes referred to as deferrals, are part of the obligation to make good in the future. Sufficient time will be needed to ensure that such obligations can be afforded (and funded) out of future profits when indeed those profits start to arise again. This could mean that, like the CBILS arrangements where the government provides an 80% guarantee, landlords and banks should mirror these arrangements and allow for loans to be paid off over a five or six-year period.
Banks to become more involved
At Gerald Edelman, we have been advising clients to carry out a very open and transparent negotiation with landlords, but it is clear to me that banks are required to be part of that open discussion. The objective I believe that could be acceptable, and it would be helpful if both banks and government could provide some influence, is for landlords to accept only surplus cash that is generated from tenants’ activities even though this would be less than the full rent charge.
At the same time, banks would then need to be supportive of their landlord clients to accept the same flow of funds which may well be lower than the agreed repayment and interest obligations behind such loan agreements.
It is also important that it is not only the high street that needs support in terms of the retail unit but also hotels and other similar establishments including accommodation for students and others where there is a tenant, landlord and bank triangular relationship.