Commercial property: Who will be picking up the pieces?
At the end of June 2020, it was being reported that commercial landlords are expecting as little as 10% of their usual rent, with those whose portfolio includes property in the hospitality and leisure sectors expecting some business tenants to pay nothing. The sector was further rocked when the group which owns and operates some of the UK’s largest shopping centres, Intu, entered administration following a breakdown of talks with its lenders.
This article offers practical guidance on protecting your business now and for the long term.
The Coronavirus Act 2020, the UK Government’s effort to keep the economy on hold, brought changes to legislation and business practice to allow tenants and landlords time to recover during and after the pandemic. Our own Ian Millington produced a guide to those commercial property changes. We have also seen the effective ‘ban’ on forfeiture proceedings for non-payment of commercial rent extended to 30th September 2020.
A swathe of fiscal measures designed to support small to medium businesses have also assisted business tenants including:
- job retention support
- local authority grants
- business rates reliefs
- VAT deferment
- government-backed loans.
The government has even produced a guide for the commercial property sector to encourage landlords and tenants to work together to protect viable businesses.
Small steps to recovery, but are they really helping?
On 15th June, non-essential retailers were allowed to re-open with the hospitality sector following suit on 4th July. These represent small steps to recovery, but in practice this is not going to translate into cash to pay the rent for most businesses for some time. In my experience of working with clients, local authorities processed the business grants efficiently and the furlough scheme has been fast to respond to employers’ need for ‘cash’.
Yet in reality the measures, which are one-offs or temporary, are only papering over the economic cracks. So who will be picking up the pieces from Covid-19 the fall-out?
Businesses have been attempting a variety of further cost-cutting exercises to remain viable. Hillyer McKeown (HM) has been instructed on matters across the business spectrum to facilitate recovery. Support is covering:
- amending terms and conditions
- variations to commercial and employment contracts
- commercial debt recovery
- employment law advice including the furlough scheme.
These are all measures that can help commercial tenants and businesses reduce their overheads, increase cash flow or reach a sensible settlement with their landlords. In connection with property, we are also advising on:
- lease terms
- exercising break clauses
- rent payment reductions or variations in payment frequency to allow for monthly payments
- sub-letting or assigning a lease (and the more drastic lease surrendering).
Where a lease is being transferred or the terms of it are being varied, it is very important to obtain the correct legal advice. This is to ensure that before you sign the ‘deal’ you have agreed upon, it is correctly drawn up and the small print can protect you.
Reviewing commercial property leases is one action you can take now, if you have not done so yet.
Is there a ‘new normal’ for commercial property?
Quite honestly the return of business and the high street, often described as the ‘new normal’, is still a blurred vision. Amid daily news of job cuts including giants in hospitality and retail, such as John Lewis and Harrods, uncertainty is becoming more commonplace.
What we can see from the government guidance is that there will be some form of social distancing for a time. Other changes to absorb are:
- reducing footfall
- premises being Covid-19 secure
- pedestrian friendly streets
- more remote/agile working
- increasing online retail including from TM Lewin.
The pace of businesses disappearing and new ones appearing is dizzying. As Eric Schmidt, former Google CEO, put it in a recent BBC programme on the impact of the coronavirus:
“Covid-19 has accelerated things that were going to take a decade into one or two months.”
As a result the predictions are for an increase in:
- office space being let for flexible working (a form of Airbnb for offices)
- flexible lease terms to allow for the above type of arrangement
- up-take in out of town warehouse space for online sales companies
- IT infrastructure projects and green technologies in all areas of the country.
What’s next for commercial property?
The current pace of change is setting the tone for commercial property landlords and tenants (and all businesses) for the longer term.
HM’s advice is to start responding to inevitable change now.
Our team of commercial property experts have experienced four decades of change, seeing economic boom and recessions alike. While each situation and business has its own unique traits, the depth of knowledge in HM’s commercial teams and innovative thinking is already helping businesses proactively respond to the current shift.
Through first-hand experience, we know that ultimately what drives businesses and industry forward is the ability to get deals done.
Thank you to the author Wesley Heath.