Mount Rent Debt

Hospitality’s return after the pandemic faces several hurdles, even after trade resumes. And one of the big issues will be how to deal with rolled up rent debts.  

Governments have introduced a range of initiatives to help improve the survival of businesses in the sector; while individual landlords and tenants have worked out their own deals, potentially involving the lengthening of leases, deferral of rent payments, or altogether revised terms.  

The challenge of resolving substantial arrears is top of the agenda for a sector that has been keen to get back to business. In the UK, a successful roll-out of Covid-19 vaccinations has led to calls for a faster reopening than that planned by the government. And there have been many in the hospitality sector calling for fairer treatment, on the basis there is no evidence that trading in restaurants and bars has increased coronavirus transmission.  

In the UK, the government moved to prevent landlords from enforcing an eviction, if rent had not been paid due to enforced Covid-19 lockdowns. Originally, the restriction was enforceable until the end of March 2021, however this was subsequently extended to the end of June 2021. When announcing the extension, the government said in a statement: “The government’s current position is to support commercial landlords and tenants to agree their own arrangements for paying or writing off rent debts by 30 June. This is supported by the code of conduct published by the government last year, setting out best practice for these negotiations.” 

At the same time, it called for suggestions as to alternative exit routes from the situation. In response, landlord group the British Property Federation has proposed to split out the issue of rent arrears, by drawing a line in the sand in June 2021. From that point forward, it suggests, tenants should pay landlords their rent as normal, under existing contracts.  

Concurrently, a process to deal with arrears from March 2020 to June 2021 could commence. If occupier and property owner could not themselves agree a solution, then the pair could instead take their situation to binding arbitration.  

“The majority of property owners have already reached agreement with their tenants, providing millions of pounds of support to those tenants hardest hit by covid-19,” said Melanie Leech, chief executive of the BPF. “However, as public health restrictions ease and consumer confidence and spending continues to grow, we now need to find a fair solution to resolve the discussions that are stalled so that all parties can focus on the future. 

“This proposal addresses this head on, ring-fencing historic rental debt – giving businesses more time to get back up onto their feet and to agree with property owners how much of their rent debt they can afford to pay – while ensuring we can reinstate rent payments moving forward.” 

Industry group UKHospitality has proposed a simple, national level adjudication that would write off 50% of rent debts for the time businesses were closed, and 25% for those periods of restricted trade. In a letter to chancellor Rishi Sunak, the group’s CEO Kate Nicholls added: “As part of the rent solution there may also be the need for further Government loan support, to bridge the gap in repaying outstanding rent arrears. We are keen to work with Government on a low-interest loan available to both tenants and landlords to offer liquidity and a speedy resolution of rent arrears.” 

Other support schemes are also in focus. UKHospitality says some of the government’s loan support schemes are not being made fully accessible, with banks dragging their feet on applications. Nicholls has called on the chancellor to apply pressure, such that hospitality businesses can access long term, lowrate loans.  

Then there are property taxes, in the form of business rates. John Webber, head of business rates at Colliers, notes that many larger businesses face a cliff edge in June, when a 100% rates relief period is replaced by a 66% reduction for a further nine months. However, there is a GBP2m cap to this relief – hitting big companies.  

“The cap is a sleight of hand – many are only just waking up to the fact that the cap is for each business group, not each outlet.” Colliers estimate that Whitbread, for example, would gain over GBP64m in relief for its Premier Inns, under the 66% reduction rule, but because of the cap will be able to reclaim just GBP2m. A similar issue will afflict most large pub and restaurant groups, said Webber: “This relief certainly won’t be significant enough to make businesses change their strategy concerning any pub closures or redundancies.” Colliers is calling for a further quarter of full business rates relief. 

“It’s a real mixed picture,” said Ben Godon, head of hospitality asset management at Colliers. “The larger, more experienced landlords have reached out and had discussions, and that happened early on.”  

“The amount of income coming back is still going to be limited,” warned Godon, suggesting government support facilities need further extension. “The most important thing now, is supporting the businesses to get back to a trading level that can afford the rent.”  

Godon reckons the experience of the last year has tilted attitudes away from pure leases. “There’s a shift, and it’s something we encourage – we’re looking at leases with a higher variable element,” as well as potentially broader use of hotel management agreements, which have enabled all parties to share the pain of reduced revenues.  

HA Perspective [by Chris Bown]: There’s lots we don’t know, about how and where the pain of lost incomes and rents has been shared – or just shelved. Many landlords and tenants will have come to some sort of agreement, some won’t.  

We’ve had visibility from Travelodge, with their very public resetting of rental liabilities, and some comments from listed groups, such as Scandic and Pandox, about how they have lengthened lease agreements, and agreed reductions or deferrals of rents. But at large, it’s impossible to discern just how much still needs to be negotiated. So in that respect, any attempt to agree a solution framework such as that put forward by the BPF looks sensible. 

Will landlords enforce evictions, once they are allowed to? As Godon told us: “You’ve got to be a brave tenant to start out now.” However, some may be moved to seek that new tenant, and use arrears as a valid excuse to sever ties in a problematic relationship. But, as we saw with the Travelodge negotiations, for many landlords it is far better to stick with the devil you know, even if you need to lose some cashflow in the short term to stay with them.  

The other issue is whether the UK market can move towards more of the model espoused by Pandox, which favours agreements containing a small fixed rent element, and a larger variable element that binds both parties to future success. It has stood Pandox particularly well, and probably been OK for its tenants too, during the last year, and deserves studying.    

Additional comment [by Andrew Sangster]: There seems to be consensus around how the pain of Covid-19 is shared between landlord and tenant: where occupying businesses have been unable to trade, 50% of rent is written off. 

UKhospitality is suggesting a further 25% reduction where the occupier has been unable to trade properly due to lockdown restrictions. And this seems a sensible compromise too. 

There are deals to be done here and, provided the Government does not become too involved in an ill-advised attempt to sort out the problem, the industry itself looks capable of reaching sensible conclusions. 

Whether there is a need codify the reset is moot. Perhaps, but far better for both sides to reach agreement without interference. Landlords, while making concessions, want to avoid having no rent paid. The alternative for occupiers in dire financial straights is to enter some form of financial restructuring such as a Company Voluntary Agreement. This may mean rent payments are avoided but it creates bad blood with landlords and may lead to eviction. 

The key part Government needs to play is to end all lockdown restrictions, particularly over social distancing, masks and testing, and promise, as far as it can, that there will be no backtracking. Both landlords and tenants would then have a clear view of the future and be able to negotiate in good faith. 

The job of Government is to be capitalism’s referee, not one of the players or team managers. The past year has seen it step-in to stop the game being played at all. It now needs to blow the whistle to restart properly and revert to the same rules of play that all participants understand. 

 

 

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