"The opening salvos between commercial landlords and their financially stressed tenants have already been launched. How landlords respond will be critical to the recovery not only of the real estate sector but of the wider economy."
Perhaps unsurprisingly, the Government last week announced a further extension to the commercial rent moratorium, preventing landlords from taking recovery action through until the end of 2020.
On the face of it, the rationale is logical. A bill for nine months’ rent falling due on 1 October could prove the final straw for many businesses, especially when combined with the curtailing of the Job Retention Scheme and the growing prospect of widespread local lockdowns. In so doing, it could severely damage the fragile economic recovery and exacerbate the crisis facing retail and hospitality.
At the same time, we cannot overlook the precarious position property owners are being left in. Many are now absorbing much of the strain being felt their occupants. Whilst it’s easy to empathise with the beleaguered restauranteur or hairdresser visibly taking blows from all sides, the impact of rent non-payment is ultimately felt by all of us through our pension funds, our insurance policies, and our savings accounts. The value of the real estate sector to ‘UK plc’ shouldn’t be underplayed - the British Property Federation estimating the industry contributes over £100 billion to our economy and directly supporting a million jobs.
With a vaccine remaining a distant prospect the extension may serve to simply kick the can down the road. Given the need to pay up to twelve months’ rent at the turn of the year, the next rent quarter day could be sorely lacking in festive cheer.
The enforced hiatus does, however, provide some opportunity to consider more innovative solutions. By entering into open and honest conversations, collaboration and compromise could allow both landlords and occupiers to weather the storm.
Landlords should be taking this time to consider both how they can support their present occupiers whilst recovering money owed and minimising the risk of potential covenant breaches. Allowing payment of the backdated rent over six, twelve or even eighteen months could be one avenue – being realistic with repayment plans whilst also avoiding arrears building up further.
This could be combined with a more extensive review of current lease agreements that can support ongoing occupancy. Rents based to a greater or lesser extent on turnover is one innovation that may be able to support viability and maintain the vibrancy of retail parks, shopping centres and High Streets across the UK.
Landlords need to consider the practical implications of such turnover rent schemes. As well as the additional administrative and auditing costs involved, landlords need to consider the appetite of their own stakeholders to, in effect, share the operating risk of the tenants and create a ‘lumpier’ and uncertain income profile.
Occupiers, on the other hand, need to be transparent, honest and realistic with their landlords on their own financial performance. Turnover rent agreements, for example, require an unusual degree of openness about branch-level financial performance. Being able to share a clear strategy for the post-COVID-19 recovery can give landlords comfort that there is opportunity for turnaround. Businesses may be surprised at the willingness of landlords to engage on ideas that can keep the lights turned on, maintain footfall and provide a continued income stream.
There will be challenges ahead. Site closure programmes are going to leave vacant units that may take months or years to be reoccupied or repurposed. Other occupiers will fail completely, leaving arrears that are unlikely to be recovered in full. Longer term, landlords will also need to grapple with the most significant market shift in commercial property in a generation as demand pivots towards the suburbs and the North.
It won’t be easy, but with collaboration and a shared goal, I’m optimistic that both owners and occupiers can play their part in our COVID-19 economic recovery.