Risk of high street collapse as retailers and landlords battle during lockdown
18th May 2020
Claire Perrett, Business tax partner at Smith & Williamson’s Guildford office states “Many of our landlord clients are seeing challenges in regard to their recent rent receipts. Kevin Ley, our National Head of Creditors Services here at Smith & Williamson, details below how Tenants and Landlords need to work collaboratively to overcome such problems.”
Retailers and landlords on the high street must work collaboratively and not push each other close to insolvency in the battle over rental payments during the COVID-19 lockdown. Otherwise, they could risk a collapse of the high street if too many more businesses go into administration, following Carluccios, Brighthouse, Cath Kidston Oasis/Warehouse and Debenhams. The relationship between landlords and tenants is symbiotic: both suffer when the other is not performing well.
Many retailers believe landlords should take the hit to their rental incomes. They expect not just the deferral of rental payments, but that landlords agree to a full write-off of a quarter’s rent. A number of retailers want to pay no rent until their unit reopens and then, once trading again, have their rental reduced.
However, landlords are continuing to incur service charges for essential services, such as security and insurance, that still have to be paid while a shopping centre is closed. When the tenants fail to pay rent, landlords still have to pay the charges. Landlords also face bank covenant and loan to asset value test pressures together with the loan repayment costs. Certain landlords will have additional pressure from pension investors.
In the Coronavirus Act 2020, landlords have had their powers limited to challenge non-payment of rent and instigate forfeiture action until 30 June 2020 in order to protect tenants. However, the Act and additional legislation does not stop landlords from:
- Deducting payments from rent deposits
- Accruing interest on unpaid sums
- Suing a tenant and/or any guarantor
A pro-active, open, collaborative discussion should find a workable solution for both parties that protects both from financial damage.
Tenants can prepare a proposal to put to their landlord for agreement. It is recommended that they should seek professional help with this and with the rewriting of any terms agreed. Information to give might include:
- Lease term & contractual rent (including turnover rent)
- Current agreement in place i.e. monthly payments and other concessions
- Forecast profit and loss (per landlord site)
- Relief available and sought under the Coronavirus Financial Support Schemes
- Cost of conforming with Covid-19 requirements i.e. domiciliary care providers – extra personal protection equipment, staffing, supply chain costs, insurance, security
- Capital and interest holidays sought/agreed with the tenant’s funders
- Time to pay and deferral arrangements sought/agreed with HMRC
There should also be scope for negotiation on sharing the potential benefits of any sudden improvement in trading and overriding market conditions, if they collaborate now.
It is essential that both parties negotiate fairly to avoid the development of an acrimonious relationship. A professional should be engaged to help with this negotiation and with planning for cashflow. A solid plan now will help them both in the long-term when business resumes, which is not only good for them, but also good for consumers on the high street.
Kevin Ley, Head of Creditor Services at Smith & Williamson
For more details please contact Kevin Ley, Head of Creditor Services via email firstname.lastname@example.org