Retail and leisure companies are struggling to recover from weeks of enforced closure. That stress is being passed on to landlords, pushing many closer towards debt covenant limits and diminishing the prospect of shareholder returns even further.
With retail landlords across the UK collecting less than half of rent due in the second and third quarters, according to data from property management platform Re-Leased, further pain is expected on the final quarterly payment day at the end of this month.
Some landlords and tenants have managed to agree rent deferrals, holidays or a switch to monthly payments, in exchange for an extension on the lease or the occupier surrendering the break in the tenancy agreement. But a growing number of landlords are pursuing debt claims against tenants they believe have the ability to pay rent.
This is likely to accelerate during the course of September, argues Matthew Bonye, head of real estate dispute resolution at Herbert Smith Freehills. “Especially so, given that typically two quarters' rent is now outstanding, but the September quarter day will leave such tenants owing the majority of the annual rent,” he says.
For many, negotiations are ongoing. “Relationships with the majority of our landlords continue to be very challenging,” a spokesperson for Revolution Bars (REV) told us. It argues that the government’s Code of Practice – which advises that the pain should be shared – has had very little impact on how its landlords have engaged with the group around ways in which it could mitigate the rental liability when trading has been severely compromised.
“We have reached agreement with less than one third of our landlords, with the remainder either refusing to engage or simply insisting on full payment; we have had more letters from landlords’ lawyers in the last three weeks than we’ve had in the whole of April through July,” the spokesperson says.
Landlords' ability to enforce the collection of rent has been restricted since the government introduced a temporary ban on issuing statutory demands for rent that would be used as a basis for petitions to wind-up a non-paying company, in an attempt to “safeguard the UK high street against aggressive debt recovery actions” during the pandemic. This ban on winding up petitions, alongside prohibiting landlords forfeiting a lease on the basis of non-payment of rent, is due to come to an end on 30 September.
"Landlords are now starting to think about whether they want to forfeit the lease after the moratorium comes to an end," says Alison Hardy, partner at law firm Ashurst. However, there is the risk that landlords will face a higher financial burden by taking back the property. "Lots of landlords that might otherwise take back a lease decide not to do that because they don’t want to have the rates liability if they can’t find a tenant to take it very quickly,” says Ms Hardy.
In March, companies in the retail, hospitality and leisure sectors in England were granted a business rates holiday until the end of the 2021 tax year, but that only applies to occupied properties. While business rates are not payable in the first three months that a property is empty, landlords would then be on the hook.
There is another crunch point looming for landlords with tenants that have been assigned the lease by a former occupier. Under clauses known as authorised guarantee agreements, companies can exit a site and pass on the lease to another business but may find themselves having to cover the rent if the new tenant runs up arrears. “If the current tenant is an assignee then this is now an urgent point,” says Mr Bonye. For such a tenant that has not paid its March quarter's rent, then the landlord’s latest possible service date for March arrears will be 24 September 2020 to do this, he adds.
However, just as the ban on residential evictions was extended at the last minute, some believe it is likely that the moratorium on lease forfeitures will be stretched beyond this month’s deadline. “But the risk is, of course, that you’re just building up a debt pile that gets bigger and bigger to the point where companies will not be able to trade their way out,” says Mathew Ditchburn, head of real estate disputes at Hogan Lovells. In turn, that could lead to more companies launching company voluntary arrangements (CVA), according to Mr Ditchburn, who says he is reading two to three CVAs a week at present.
New Look became the latest major retailer to launch a CVA proposal last week, seeking a three-year rent holiday on 68 of its stores and converting just over 400 stores to a turnover-based rent model. More retail and leisure landlords are introducing a link between a tenant’s turnover and their rent obligations. However, that can be challenging, not least because some retailers are reluctant to share trading information for fear it is leaked to the market.
"It’s pretty hard for landlords to digest because it doesn’t give any certainty of income, but a percentage of something may be better than a whole lot of nothing," says Dan Norris, global head of Hogan Lovells’ real estate practice.
There is also the question of how to account for ever-more important online sales. Last month Hammerson (HMSO) said it would include an “omnichannel top-up element”, which could include a turnover-based rent with an adjustment for the role of 'click and collect' in store.
Turnover-linked rent can also make valuing an asset more difficult and impact how lenders judge a commercial property group looking to refinance, says Knight Frank head of retail research Stephen Springham. “There’s not the security of knowing exactly what’s going to be coming into the accounts come quarterly rent [day],” he says.