By Mark Wingett
In many classic horror films, there is a scene when one of the main protagonists is running away from some sinister presence. No matter how quickly he or she runs, there is an inevitability that said presence will eventually catch her or him – there is no escape. That, for me, is the rent issue facing the UK’s hospitality sector. There is no avoiding it and, later this year, either at the end of March or more likely later in the summer, the can-kicking will stop and the issue will catch up with the sector – carnage will follow. As Jonathan Downey, founder of Hospitality Union, and long-term agitator for a rent solution, said earlier this year: “For many, it’s already too late but the billions of pounds of mounting rent debt is still the biggest problem facing hospitality businesses hoping to reopen in spring. The government continues to do nothing, hoping the problem will magically go away or resolve itself. It won’t.” Almost a year since the country was plunged into its first lockdown and the eviction moratorium was initially introduced, we are still no nearer solving the problem, which, for all the other support the sector has secured, will torpedo everything else. That it is not a black and white issue, but a private contract area that the government is unwilling or unable to step into, means, sadly, it has been allowed to drift. The government’s wish that this can be sorted out among ourselves – hence the tepid and mostly ignored code of conduct it endorsed – is not going to come true without further pain. No one should envy the chancellor having to come up with a solution but, at present, it seems any thought of one is very much on the backburner. But a solution is needed because, as serial sector investor Hugh Osmond pointed out: “Another 40,000 hospitality venues could go bust within a few weeks of the moratorium being lifted with the loss of more than one million direct and indirect jobs.”
Loungers chairman Alex Reilley has said the rent situation facing the sector is the government’s “Trojan horse” and unless it comes up with a plan, it “will have wasted billions of pounds keeping people employed by businesses that you will have allowed to fail”. In a twitter thread, Reilley added: “The vast majority of hospitality businesses will have traded between zero and 14 days since 4 November. On the (optimistic) basis they can trade again by early March, that’s zero to 14 days trade in four months. That’s on top of more than three months of full lockdown. That’s at least seven months out of 12 where hospitality businesses have been ordered to close. The debt moratorium is going to end at the end of March. Thousands of hospitality businesses that won’t have been able to trade for seven out of 12 months will be exposed to landlords that won’t accept anything less than 12 out of 12 months’ rent. They will serve winding up petitions, locks will be changed and some will cut their nose off to spite their face.” Reports earlier this month that Criterion Capital, the property firm owned by Asif Aziz, had filed claims against its tenants even though they say they cannot afford the rent while closed under covid lockdown rules, highlight there are landlords ready and waiting to push the nuclear button when they are allowed, although anyone who has any dealing with Mr Aziz down the years will not be surprised by his stance. But there is a minority that will also take his approach.
For some, this is the heart of the issue – the adversarial rhetoric and positioning that certain groups, be they property owners or operators, continue to employ. This is not a time for “them and us”. The headline-grabbing quotes are deeply misleading because most property owners are not the cigar-chomping, pin-striped barons they are painted as – they are every single man and woman in the country via local authorities, charities, pensions and so on. Equally, the vast majority of tenants are not out to get their landlords. They are understanding and empathetic to the fact property owners are suffering badly as well as them. Adam Coffer, managing director of leisure and retail investor EPF and chair of Property Owners Forum – a group set up during the pandemic that represents more than 150 members – said everyone must recognise that when contracts such as leases and banking facilities were drafted, nobody envisaged this “near-apocalyptic scenario for our industries, so a collaborative approach is required to find short-term remedies, allowing long-term health”. He said: “It requires all parties showing a preparedness to work in partnership and not assume the agenda is underhand. Where engagement and dialogue have been applied, we have found an enormous amount of success is achievable in terms of agreeing waivers and concessions to assist tenants who are struggling through absolutely no fault of their own. Where such tenants can demonstrate financial inability to pay anything, due to the forced closures and associated measures, scrupulous property owners will show pragmatism and help as far as possible. Those who do not must be deterred. But the unintended consequence of the government’s moratorium has been to allow unscrupulous tenants/operators—those who are well-funded, open and able to pay towards property overheads – to simply ignore landlords and discourage engagement.” For Coffer, it seems we have found ourselves in a “won’t pay anything” rather than “pay what we can” scenario from certain operators that are in a position to pay. He said: “This not only hugely undermines the ability for landlords to help those tenants who truly require assistance, but has merely delayed payment of arrears rather than result in waivers or agreed deferments. There is now going to be a huge bottleneck of unpayable debt.”
The key for Coffer is to encourage dialogue and collaboration. And, crucially for him, this should involve lenders. He said: “Property owners are the meat in the sandwich under the current rules because when agreeing rent waivers, the property owner is not, in turn, granted any forbearance on their loan payments. If lenders grant forbearance on a pro-rata basis to landlords offering rent concessions to tenants, the health of the tripartite system is preserved and the pain is genuinely shared. Our members have been trying to help tenants since the onset of the pandemic and we have seen, invariably, that where there is a collaborative approach, waivers and concessions are agreed, in partnership.”
That sense of partnership is also key for the larger institutional landlords. As major player told me: “We are trying to come to arrangements that are sensitive to our customers’ needs but without us taking all the pain. It’s a fine line but we are making really good inroads. With the prospect of the moratorium being lifted, most customers are coming to the table but there remains a handful that are resolutely holding their position of cash preservation, to the detriment of the relationship and without looking to the medium-term reality (in our opinion). Where we have come to agreement it has worked for both parties. For instance, we’ve agreed a rent concession with a national restaurateur across the portfolio and in return they have offered us a higher turnover rent and we will receive more rent this year in locations where delivery is strong and they’ve been able to optimise their operation. They are happy to pay the rent where they are trading well and we are happy to support them in more tricky locations. We are also working closely with those parties that are active and expanding, and we have a significant square foot under offer within our retail portfolio. That helps where we are struggling to reach agreement with existing customers. We have a good idea what our Plan B would be by location when the moratorium is lifted.”
For Osmond, if the government stops tenants having any income then “by all known measures of fairness, everyone down the chain – including landlords, banks, etc. – has to have their income stopped too”. He said: “The whole principle of renting a trading premises is that you can trade from it – no one would pay rent for a site they could not trade from. It is also quite obvious that is how the payment waterfall works. The tenant makes revenue from sales to customers and out of that revenue he/she has to pay all his/her costs: 30% cost of sales; 30% wage costs; 10% rent and rates; 10% other costs; 20% (hopefully) profit. And from this profit, the individual owner/operator has to live. So, if the tenant’s revenue is stopped, surely it is obvious all the costs payable from it must be stopped too? The argument that the landlord needs to make a living is complete nonsense: the tenant is not making a living regardless of whether the landlord gets paid, because he/she has no revenues.”
All agree it is hard for the government to step in because every landlord is structured differently with differing priorities, and every retail and hospitality sector have their own nuances. As one institutional landlord told me: “We also jointly own a number of assets with other funds, developers and landlords, so we have seen a number of different views, strategies and attitudes towards rent collection from our joint venture (JV) partners in general, by sector and down to the individual customer. We have to seek consent on all the deals we are doing with our JV partners. We have a team of circa 50 people dedicated to coming to agreements and documenting those agreements with each and every customer. Many of our customers are light on team members having utilised furlough, so it’s difficult for them to come to a separate agreement with each of their landlords. It is not easy and we are having some challenging conversations.”
For Trevor Watson, executive director, valuations, Davis Coffer Lyons, direct intervention is very difficult. He said: “One size fits all won’t help – some operators (drive thru/delivery/QSR) have been trading very well – others, like nightclubs, have a long way to go. It is the arrears that are clearly the issue – not so much rent going forward. Give tenants a specific period of up to say five years in which to clear the arrears at a sensible rate.” In the longer term, Watson called for upward-only rent reviews to be prohibited for leases entered into now and a comprehensive revision of insolvency laws to introduce a Chapter 11 equivalent. David Abramson, chief executive of Cedar Dean, said: “The evidence is now overwhelmingly clear the current commercial leasing system is broken and must adapt urgently. We are seeing a wholesale rent evolution unfolding, in our eyes, and we are calling for a wholesale shake-up of the current leasing system, long term, to include: upward-only reviews need to be abolished and affordability clauses need inserting; rates and rents should be presented as one cost to the tenant and landlords should bear responsibility for the rates to ensure transparency of cost; affordability clauses need to be inserted into leases allowing a tenant to surrender the lease if the rent becomes unaffordable; and there also needs to be a review of the company voluntary arrangement (CVA) process to protect healthy businesses from being at a disadvantage to those who have done a CVA.”
In the short term, I would be amazed it the eviction moratorium isn’t extended for a further quarter. Of course, a further extension of the moratorium will not help unless there is specific help set out with the arrears aspect. Some believe the chancellor could let the market do its worst – there are no votes in putting money directly into the hands of landlords or bankers – which is what rent support does. However, with a roadmap to reopening the country due later this month (either on the 22 February as initially promised or the week commencing that date), extending the moratorium until June should allow more tenants to settle terms once they know what the new normal is starting to look like. Abramson said: “Make it law that from March 2020 to June 2021, landlords cannot evict tenants for back rent if they can prove they have been materially impacted by the pandemic and they are not able to pay – ie, they would be insolvent without landlord support. In the same period, lenders cannot take possession of property from landlords if they can prove they were not able to collect rent/and or not pay. Government should also make recommendations that landlords receive 10% of the turnover in this period with no base rent. It should also be rates free for non-delivery hospitality for another 12 months.”
For Coffer, the industry should continue to push for the following key criteria to be demonstrated and for appropriate agreements to be sought in collaboration: demonstrate financial requirement, including cash and available funding; demonstrate an attempt to engage (both landlord and tenant); an agreement from business owners/executives to not draw large dividends or executive pay during any period subject to rent concession; and acknowledgement that a “blanket” approach to attempt to “retrofit” a new leasing structure to the entire country is facile and shows no reverence to the unique nature of each individual tenant and landlord. The large institutional landlord said: “Firstly, the government needs to provide a clear roadmap out of this lockdown with dates and restrictions that will be in force so the sector has clarity and certainty. The pre-Christmas debacle was soul destroying and financially punitive to the sector and supply chain. Provide guidelines and third-party adjudication between tenants and landlords where no agreement on rent and arrears has been found. For this to work, both parties need to demonstrate they have been in communication with each other, have had meaningful and significant conversations about rent and that proposals have been made on both sides.”
Over the past few years, the government has spoken about an Australia-style Brexit trade deal and, in Osmond’s opinion, the most likely idea to fly with the government in terms of the way out of the impasse – although one he doesn’t agree with in principle – also has its origins Down Under. In this “Australian model”, rent during the covid-affected period (and a reasonable recovery period) is set aside in direct proportion to the tenant’s loss of turnover during the period; if a tenant took just 20% of normal sales over the year, then 80% of rent is set aside. Osmond said: “This is the ‘covid rent’. Of the rent set aside, not less than half has to be forgiven completely and the other half paid off over an extended period (two years I think). However, I think I am right in saying that the ‘covid rent’ can never be used as a reason to foreclose on or evict the tenant, even if not paid subsequently. There is an arbitration clause. As I say, I think this is still somewhat unfair on the tenant but the reasons we should probably go for it are: Australia essentially has the same legal system and legislation as the UK – basically it operates on UK law and decisions in the Australian courts are still used as precedents in the UK and vice versa. It provides a clear, simple, certain solution that everyone can easily understand and it is easy for the government to introduce. Most importantly, it has been done and it has worked – both sides have grumbled but everyone has bought in and got on with life. There have been very few cases requiring arbitration.”
Over the next few weeks, other key issues should, hopefully, become clearer – a roadmap to reopening and the necessary support needed to make that a reality for most. However, the rent iceberg continues to get bigger and moves ominously towards the sector, ready to sink businesses that are looking to make the journey into the recovery phase. The can is going to be kicked down the road for another three months, the government really has no other option, but it must use that time to fully focus on reaching a solution that helps the majority, if not all, be that operator or landlord, because they will both need each other on the other side.