Property report: Sharing the pain

Commercial property landlords and tenants are being urged to work together to ‘share the pain’ being inflicted by the coronavirus crisis.

It is a pain that has been felt on both sides as enforced closures on the high street and the lockdown on pubs, bars and restaurants have had businesses struggling for survival.

With tenants unable or unwilling to pay their rent bills, landlords have been put under pressure themselves. One survey of property managers revealed that UK landlords collected just 57 per cent of rent due for the March quarter by the end of that month. There are fears the situation is going to get worse.

David Bailey, head of commercial property litigation at Lancashire-based law firm Napthens, sums up the situation. “The pandemic is a game changer for the usual landlord and tenant relationship,” he says.

However, he adds: “It’s not in anyone’s interest to take an extreme position, either the landlord or the tenant of a commercial property.

“In most cases it is not appropriate for landlords to pursue every penny of rent when they know a tenant is struggling in the current circumstances. Also, in most cases it is not appropriate for tenants to refuse to pay anything.

“By working together and considering the specific circumstances of the subject property, the landlord, the existence of any support from the landlord’s lender, government financial help available and the tenant’s business, both parties can come through the challenges.”

Mary Hickman, director of Preston-based chartered surveyor Eckersley, says she has seen a “broad range” of approaches from landlords and tenants to the pandemic.

She says: “Some landlords do seem to consider the impact and financial burden to be purely a tenant’s problem whilst others are taking a more pragmatic view to the situation and are willing to discuss revised payment programmes and, in some instances, be prepared to share the pain Covid-19 has created.

“Conversely, it is also reported that there are tenants who some consider are taking advantage of the situation and simply ‘pulling the shutters down’ on rental payments whether they are suffering financial hardship or not.

“At present the need for continued communication between landlords and tenants is greater than ever as the impact of the pandemic has resulted in a dynamic situation which continues to evolve.”

Mary says that initial forecasts suggest there will be an “adverse impact” on retail rental values and levels of demand from prospective occupiers.

Michael Cavannagh, director of east Lancashire-based commercial property consultants Trevor Dawson, agrees that the partnership approach is vital in the current situation.

He says: “While the country has been in lockdown very few new lettings have taken place and deals that had been negotiated have been put on hold.

“Tenants, particularly in the retail and hospitality sectors, have been requesting rent deferments or even rent-free periods during their existing agreements.”

He adds: “Retail is the main worry for us and will take the longest to recover especially with a new wave of online users. We have seen lease renewals agreed with a one-year rent free on a ten-year lease, which we have not seen since 2008.

“Break options will become more prevalent with tenants wanting to minimise risk going forward until we get more certainty.”

Looking at the question of assessing rent in the present climate, where a lease renewal or review becomes due, he says: “Market transactions provide the comparable evidence upon which negotiated rents at review or lease renewal are based, yet there are few deals taking place.

“Should the new rent be based upon pre-lockdown deals, which may not reflect the new reality going forward, or should the landlord and tenant try to predict the ‘new normal’?”

He adds: “We have seen landlords concede rent free periods upon lease renewals, reflecting the short-term agreements being reached in the market during the unprecedented lockdown.

“However, the basic or headline rent can be more difficult to ascertain, particularly in the sectors which have been most affected by social distancing. Can we be certain what the world will look like for restaurateurs in 12 months’ time?

“In many cases at lease renewal both the landlord and the tenant are looking for some certainty going forward and are keen to agree a new lease term.”

Michael says: “We have recently seen leases being discussed which provide for a rent review after 12 months, when hopefully the position will be clearer. This can give both the landlord and the tenant the benefit of certainty of the continuation of the lease, while not committing to an unrealistic rent.

“Protecting the interests of both parties is the key to reaching an agreement that can last into the future and a pragmatic approach is required. Landlords and tenants now, more than ever, need to work together.”

Acutely aware of the crisis, the government has acted. That includes introducing the Coronavirus Act 2020, which came into force in March and means commercial landlords are precluded from forfeiting commercial leases and evicting tenants for non-payment of rent. The measure was in place until June but may well be extended.

Eleanor Longworth, associate solicitor at WHN Solicitors, which has offices across the county, says: “The clear government objective is to assist tenants and ease the financial burden in the hope that they will survive the crisis and continue to trade when the restrictions are lifted.”

However, there is concern about the predicament of commercial landlords who rely on rental income stream to stay in business.

She adds: “Landlords may be left with a significant gap in cash flow, with insurance premiums and contractors still to be paid. Government initiatives to date have been tenant focused, with little being done to help landlords who may themselves be under significant financial strain.

“Although ministers have urged banks and investors to consider ways to address these issues, many landlords will be at the mercy of their lenders. We hope the banks too will adopt a cooperative approach in order to ease this enormous burden.”

Hayley Bamber, associate solicitor and property litigation specialist at Lancashire law firm Harrison Drury, says landlords should look at the “bigger picture” when re-negotiating leases and collecting rent arrears.

She says: “The Coronavirus Act has prevented landlords seeking forfeiture of the lease for non-payment of rent. Some tenants have also benefited from agreed rent deferrals, rent holidays and relief on business rates.

“New legal protections are being considered, but we’re entering a critical period for landlord and tenant relationships as some of this support comes to an end.

“Landlords absolutely need to keep the money coming in, but if they are aggressive in demanding rent, they potently risk the tenant becoming insolvent. In what’s likely to be a tough market, do they really want to risk having empty properties?”

Hayley believes both tenants and landlords need to take control of the situation early to avoid issues. “This is going to come down to trust and understanding,” she says. “It’s about finding a mutually beneficial way to move forward.”

Giving some clarity

High street businesses and landlords are set to benefit from a new code of practice, which the government says will provide them with “clarity and reassurance” over rent payments.

A working group was set up in early June to develop a code which encourages “fair and transparent discussions” between landlords and tenants over rental payments during the coronavirus pandemic.

The government says it will also give guidance on rent arrear payments and treatment of sub-letter and suppliers.

Communities secretary Robert Jenrick said: “We are giving clarity to landlords and tenants who are both facing equal pressures on their finances, so they are all able to stabilise their finances and bounce back.”

Melanie Leech, chief executive of the British Property Federation, said: “Coronavirus is placing an unprecedented strain on property owners and the businesses who occupy their buildings, and we need a united approach in response.

“The majority of property owners and tenants are already working well together, effectively engaging and agreeing sustainable plans, and we welcome the opportunity to work with government and others to codify this good practice.

“Fair collaboration among lenders, property owners and tenants is vital to the UK’s recovery and it will ensure that viable businesses in distress as a result of coronavirus are supported, to protect both people’s jobs and the local authorities, savers and pensioners who own the majority of our town centres.”