I attended a really interesting and informative Bisnow webinar on 2 June 2020 held in conjunction with The Lorenz Consultancy. The hot topic of conversation was the upcoming June quarter rent and how landlords and tenants have been reacting to the Covid 19 crisis and approaching negotiations around rent concessions.
Guest speakers Anthony Lorenz (Managing Director of The Lorenz Consultancy), Touker Suleyman (Dragon's Den and Retail Entrepreneur) and Alex Oswald (Managing Director of Caesars Entertainment EMEA) provided an insightful analysis of the position on the ground and how the retail, hospitality and leisure sectors, in particular, have been coping.
Some of the keys takeaways for me were:
- Communication and transparency between all parties is key.
- Sensible landlords are those who are working with their tenants to see how they can navigate the crisis together as without their help, they realise that some of their tenants simply may not make it.
- Banks also need to play their part and we are seeing a need for landlords, their banks and tenants approaching the crisis as a partnership.
- There are various concessions being negotiated in the market from rent free periods and rent deferrals to re-structuring of the rent and lease terms. Some landlords are even volunteering concessions to their tenants.
- Rent deferment will not always be an option for a tenant where it will ‘just kick the can down the road’. Tenants don’t want to take on deferments or government loans just to put off the inevitable. However, in some cases, deferring rent to a period where cash flow will improve (e.g. in retail, between black Friday and January sales) can be an option. There is a need to look at cash flow for next 12 months.
- If landlords refuse to co-operate and take a hard line then we could see the Government stepping in to protect against the risk of further redundancies and the negative impact on tourism arising from widescale store closures.
- Tenants must have a genuine problem when approaching landlords to try and negotiate a concession and must be prepared to disclose all the financial and other information that a landlord may request. Landlords are alive to the fact that some tenants have been abusing the situation to try and take advantage of landlords (or as Touker Suleyman referred to it, ‘landlord bashing’). Landlords will, however, need to be sure that a tenant is behaving ingeniously before reacting. It is therefore critical that it carries out a full investigation and analysis of the tenant’s position including, for example, identifying how much cash is in the bank, what is the position with regard to employees, when will the tenant realistically expect to go into profit and what will the profit line look like. A comprehensive questionnaire provided by a landlord to a tenant is a useful way of getting this information and a tenant’s accountant can also be asked to verify the same.
- There is hope that the Government will extend existing moratorium on forfeiture which is due to expire on 30 June 2020.
- Could we see an increase in the use of turnover rent provisions in leases or, more likely, a mixture of fixed rent and turnover provisions. Or would a profits test be fairer? The Banks would, however, need to support this approach.
- It was thought that the position may get a bit easier after the June quarter as if a tenant can pay something, there will be the opportunity for a bit of give and take. Landlords should be upfront with tenants as to what their expectations are. Most landlords will listen as cash is king. If a tenant can pay any rent to a landlord it should and it will be welcomed by the landlord.
- Tenants who have leases expiring in the near future will need to think carefully about their options in terms of renewals. Short term extensions will probably be sensible.
- Will the Government be taking any steps to kick start the economy and how will it be done. Could members of the public be issued with vouchers to spend in retail stores?
- Covid-19 has accelerated a lot of changes in the retail sector that were gaining momentum prior to the crisis. Every CEO will be re-evaluating their portfolio(s) and every chain will likely be looking at reducing stores. Shopping centres will change as landlords look to alternative uses to try and fill the voids. Creativity and flexibility will be key as we will see more leisure, technology, hotels and pop-ups in shopping centres.
- The hospitality and leisure sector has really been hit hard with challenges around cash flow, labour costs and supply chains. Businesses have been looking at cash flow and assessing how long they could survive.
- The furlough scheme was welcomed and the tapering withdrawal of the scheme has provided a greater degree of confidence that businesses can move forward as many feared a cliff edge withdrawal of the scheme.
- The re-opening of businesses will help to provide some stimulus, however, it is likely that some business will not open immediately even if permitted as it will simply not be viable.
- It is likely that the hospitality and leisure sector will take 2-3 years to return to similar trading levels pre Covid-19 and it is probably going to be the middle of next year, at the very earliest, before loss making is at the operating level. So deferring liabilities so they are due during that window is not going to help.
- Landlords and tenants could explore re-gearing leases with tenants giving landlords back part(s) of their premises if a landlord is able to re-let or re-purpose it. There could be deals to be done in these scenarios.
Whilst the above is a snapshot of what I have taken away from the discussion, the webinar is certainly worth a watch so I have included a link to it below.