Essential Fairness Points the Way Towards Landlord and Tenants Sharing the Pain

Posted by Colliers on 12th May 2021 -

The clock is ticking down to another disaster for the hospitality industry – I’m not talking about another wave of COVID-19, but the end of the rent moratorium. 

However, with signs that both landlord and tenant representative bodies now agree on the principle of sharing the pain, a recent county court decision has pointed the Government in the direction of an intervention that can provide of a fair solution for all.

The 30 June is weighing heavy on many hospitality businesses’ minds, particularly those who have suffered because of the extended period of enforced closure over the last year. Debts have been mounting up, according to UK Hospitality unpaid rent is estimated to be in excess of £2.5bn across the sector. The Government’s moratorium against forfeiture and some debt related legal actions has given the sector much needed breathing space. However many businesses are understandably concerned about what will be their fate come 1 July – could they face a legal demand for payment and notice of eviction, ending their business’ recovery hopes so soon after being allowed to reopen? 

Landlords themselves have also had to manage significant interruptions to their rental income, having to juggle their own fixed costs, including insurance and service charges, with obligations to their lenders. Industry bodies have expressed concern in particular that some well capitalised businesses, including some retailers that have been able to remain open without restrictions throughout this crisis, have not engaged in good faith during this period. 

The Government’s call for evidence promises an intervention to protect jobs and livelihoods. Its consultation asked businesses to share evidence of what they would expect to happen under six scenarios. One option included the disaster scenario of no further intervention post 30 June; another simply kicked the can down the road with another short extension to measures for specific sectors impacted the worst by the pandemic; whilst the final option offered a binding non-judicial adjudication between landlords and tenants. But none of the options on its own are quite what the hospitality sector is looking for. 

The Government’s first option to do nothing could result in a demand for back rent to be paid all at once, which would be unfeasible for most businesses and achieve nothing, apart from leave many landlords with a vacant unit and further delay until rent can be secured. It’s essential that the moratorium is extended at least until the end of the year, to allow businesses who are only just restarting to trade to establish themselves again, and have a good few months of certainty behind them before they have to face their accrued debts.  

However, any solution to tackle the rent debt needs to acknowledge the elephant in the room; not all of this debt can or will be paid. 

Interestingly, the responses from both landlord and tenant industry bodies demonstrate an element of agreement on a solution that may work.  British Land and Landsec announced the stance they would be taking in partnership with the British Property Foundation, whilst UK Hospitality’s proposals were highlighted in a letter to Robert Jenrick. Given the seemingly obvious conflict between the interests of both groups, it is perhaps surprising how many issues the two proposals actually agree on. 

BPF say that it is “only right that the landlord, hospitality and retail sector share the pain”. They are proposing to ring-fence the debts since the beginning of the pandemic and encourage tenants and landlords to agree a way forward by the end of the year, with payments towards an agreed amount of debt expected to resume in 2022. To encourage agreement between the parties they seek a binding arbitration, and suggest a benchmark of a 50% reduction in rent for those periods when business have been unable trade and are unable to pay. 

UKH’s calls for “decisive Government action” seeks an extension of the moratorium to the end of 2021, and also proposes a binding adjudication process that aims to share the pain of closure with at least 50% of debt written off during the period of closure. They also seek an expansion of the protections to include all enforcement activity such as CCJs, so as not to undermine negotiations. 

These two proposals are similar to the recent judicial intervention by Richard Parkes QC who at the end of March handed down a judgement at county court on a pandemic clause being included in a new lease. The decision on the case between WH Smith Retail Holdings Ltd v Commerz Real Investmentgesellshaft MPH ruled that the lease in question should include a pandemic clause, and this clause would include a 50 per cent reduction in rental payments should the business face enforced closure by Government restrictions. In his ruling the judge concluded “essential fairness demands” the inclusion of such a pandemic clause into new leases and agreed to this sensible rent reduction suggestion.

With consensus between industry bodies on both sides and judicial decisions already made, we are now only looking for Government to agree what has already been set out before them: a binding adjudication should set this minimum benchmark for the outcome, whilst providing occupiers with an extension to the moratorium until the end of the year, while also instructing lenders to support landlords during these negotiations and protect them from any debt recovery action as well.

The only way the Government can protect the interests not only of hospitality businesses, but the high streets and the economy as a whole is to share the pain between landlord, tenants and lenders because no-one is immune from the impact of this pandemic, and concessions have to be made across the board.

*This article was originally published in Propel on Friday 7 May 2021.