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Rent crisis: What's the answer for operators without income?

29 May 2020 by

The next rent due date is looming and the industry is no closer to settling the question of how businesses are going to pay without an income. Emma Lake searches for answers

Narratives have long set landlords on one side of a battlefield and their hardworking tenants on the other – particularly in London, where rents have soared and operators been squeezed tighter and tighter.

As the Covid-19 pandemic hit and restaurants were forced to close, negotiations for immediate rent relief commenced. Some operators found their landlords were receptive to rent holidays while businesses are closed – but by no means all.

UKHospitality chief executive Kate Nicholls is calling for a long-term solution facilitated by government. She says: "The majority of landlords have been co-operative, but a minority have aggressively pursued hospitality businesses that are moth-balled, have no revenue and cannot hope to pay."

Businesses have been closed for more than two months and it will be at least another month before any sites will be able to open their doors, and considerably longer before footfall, turnover and profits return to pre-Covid-19 levels. Agreements will need to be made between landlords and tenants to secure the long-term viability of businesses.

Rethinking rents

Stephen Owens
Stephen Owens

Stephen Owens, managing director – pubs and restaurants at Christie & Co, says: "I think the majority of operators have paused rent payments and are having ongoing dialogues with landlords that cover everything from rent holidays, rent suspensions, pausing rent, rebating, or possibly moving to turnover-based rents as we come out of this.

"The difficulty is that we have no real visibility on when businesses may be able to reopen – other than the vague idea of early July – or what that's going to look like, so it's very difficult to say long-term how people will want to rebase rents."

Simon Chaplin
Simon Chaplin

Simon Chaplin, senior director – corporate pubs and restaurants at Christie & Co, adds: "It's a question of how much should you pay. If you can only open half your business, do you pay 50% rent? Will the landlord accept that or will they be looking for full rent or will the government support that?

"The pain is starting to come in now and landlords are starting to think ‘I can't give this rent up for another quarter'."

It's a question of how much should you pay. If you can only open half your business, do you pay 50% rent?

Owens says he doesn't feel "terribly confident" that widespread agreement will be easily reached unless the government intervenes, with the moratorium on evictions, which is in place until the end of June, seen as pushing the problem to later in the year.

UKHospitality has called on the government to do something before the next quarter's rent is due in June, and has backed Jonathan Downey's campaign for a National Time Out on rent, which calls for a nine-month suspension of payments coinciding with the pausing of mortgage or debt payments for landlords.

However, the government has yet to act, so far focusing on routes to finance for businesses, many of which are facing the prospect of building a debt pile that must be tackled at a later date.

Photo: Shutterstock
Photo: Shutterstock

While there is a question mark over whether government aid will appear, tenants do have a strong case when entering into negotiations, with landlords likely to struggle to fill properties in the coming months.

Owens says: "We're looking at anywhere between 20% to 30% closures in the hospitality sector, so hopefully landlords will look at that and think we need to cling on to our tenants and make it attractive for them. Hopefully, common sense will prevail and they'll try and reach agreements, but it's a balancing act and it's not going to be straightforward."

Chaplin adds: "A lot of landlords are family trusts or pension funds that have been around for 20, 30, 100 years, and this one-year incident can be put at the back of the drawer. A lot of landlords could take a bit of pain now for the future. From the restaurants' point of view, they can't take the pain now, they're already in pain, and this could just kill them off."

Turnover translated

Both Owens and Chaplin agree that flexibility is needed, with agreements being reviewed regularly as restrictions on trade and consumer confidence change.

"Trying to renegotiate rents today is impossible without knowing what everything will look like in 12 months' time," Owens explains. "That's why the idea of turnover rents seems to be gaining traction. I think both landlords and tenants see that as a fairly open way of going forward. The landlord has visibility on how the business is performing and, if it has been structured in the right way, the tenant can pay what it can afford. But it's not simple.

"Every business has a different break-even point. I think that's why some landlords are finding it difficult to get their heads around – they're not in the detail of the business, so they don't know what that turnover rent should necessarily look like. Tenants and landlords need to work together to find solutions.

"The frustration from landlords is that they need certainty because they need to go to their own funders and say, ‘we've agreed this'. The difficulty for tenants is that they don't have certainty, so trying to structure something with landlords that gives them certainty is difficult. They need to give themselves breathing space."

Trying to renegotiate rents today is impossible without knowing what everything will look like in 12 months' time

While turnover rents are now being seen as an answer for many, they have not previously proved overwhelmingly popular.

Owens explains: "From a landlord's perspective, a turnover rent was effectively betting on the quality of the tenant, so if you've got a great tenant, you benefit, if you have a poor tenant, you don't. They often don't understand the operations – and why should they? Where it did work was in airports and transport hubs, where the landlord is integral to the operation, interested in tenant mix and wanting to understand the dynamics of the offer."

Chaplin adds: "Likewise, every operator thinks they're better than anyone else, so they haven't wanted to pay a turnover rent because they think they'll be paying away some of their personal goodwill. They probably will [agree to a turnover rent] at the moment, but whether a good operator in five years' time would be happy tied into a turnover rent when they're performing well, I don't know.

"The other difficulty is that every operator is different. JD Wetherspoon is high-volume, low-margin, so its turnover percentage would be massively different to a Michelin-starred restaurant. It's understanding the dynamics of individual businesses. It works in transport hubs where all the businesses are high footfall and relatively high turnover, but it doesn't work in businesses that are more specialised."

A change of focus

Some brands are already looking at site closures, while others have filed for administration. Chaplin says that it is worth remembering that high rents had been "driving operators out of business" even before Covid-19 hit, and reductions were already needed – possibly to the tune of up to 30% in the capital.

He predicts that the current crisis could accelerate that process in the short term: "There will be certain areas of the country where there will be a glut of sites and there won't be any takers. How long this goes on for depends on how long social distancing is needed, but why would you go into a city centre site when office workers are at home? There just won't be the demand.

"I was talking to one operator with about 40 sites in London who can't see themselves opening more than half of those sites. When people return and tourism comes back, maybe in three years' time, they can, but operators can't see that happening in the next 12 months.

"The value will be the suburban sites and possibly some of the shopping centres because they could restrict numbers and people could feel more comfortable in a food court, for example, where they can drive there and sit two metres apart. Country pubs with car parks, gardens and spacious interiors and hotels will, I think, be the first to come out and possibly do very well because people will want to take staycations."

While Owens thinks the Covid-19 crisis could be a "seismic event", Chaplin is not so sure it will mean long-term changes. He adds: "Looking at previous recessions, memories are short and, in a few years' time, you'll have a young operator saying ‘right, I've got this great concept, I'm going to go into all the major sites in London and I'll pay £200 a sq ft no problem at all'. They'll come in, mess up the rents for every other operator and we'll be back to square one again and everything will have been forgotten."

An operator's view: Will Beckett, Hawksmoor

Will Beckett
Will Beckett

Broadly speaking, landlords fall into three groups: the aggressive ones, the extremely understanding ones, and the stand-off group. The first two are in a minority.

Everybody else has said that they think rents are due. We think they're not, and we've just parked the issue with nobody pushing too hard. I think there's still a hope that government might intervene and there might be a legislative answer.

I'm a co-signatory to the National Time Out, but there are other schemes. There's a property furlough scheme, which the retail consortiums are pushing for, where landlords, tenants and governments share the pain, but it's hugely expensive. I don't think we're particularly close to a solution coming from the government and the next rent day is 25 June.

Turnover rents look like the most sensible route. There are plenty of businesses that have turnover rents, but it was a landlord model in the past and the lease would say you had to pay the higher of the base rent or a percentage of turnover (ie, if you do better than we thought you would, we want some of the upside). I would suggest this would need to become a tenant turnover rent (ie, we'll pay you the lower of the base rent or turnover). When we get back to a stage where we're trading as we used to, then by all means we can revert back to the model we have at the moment, but until then we can only pay what we can.

Hawksmoor Air Street
Hawksmoor Air Street

With this model you could also look at a type of furlough scheme, which could be a way for the government to intervene. It could work like the Coronavirus Job Retention Scheme, where landlords get 80% of their rent, tenants pay a turnover amount and the government guarantees the rest.

I think we're quite a way from individual negotiations. In my experience, landlords are much slower to acknowledge the economic reality because the debt arrangements they make are predicated on a relatively static and upward-only model that hamstrings what landlords can do.

I think any solution needs to look to mediate, not just between tenants and landlords, but between landlords and their banks as well. My gut instinct is either it will come down to government legislation or there's going to be a massive number of insolvencies.

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