We have a general resource here on overall property management issues to consider during these unprecedented times of the Covid-19 outbreak.
Tenants of commercial properties being able to pay their rents has been critical, particularly with the popular quarterly-payments being due at the end of March and monthly ones at the beginning of April when lock-down began.
Well here are some tips to help guide you through this process, to see what legally is allowed, and how to pragmatically come to an arrangement.
As a tenant, you will understandably be wanting to arrange rent reductions to ease cash flow, whereas landlords will be eager to still receive these to pay mortgages etc. And if you’re a managing agent or property advisor in between, you’ll be stuck in the middle with knowing what to do.
We have approached this in three stages to help simplify, however, with technical information within these to delve into more detail if needed.
The order of these three stages may appear strange at first as we begin with the start, then go to the end stage, and finish with the ‘middle’ stage.
This helps place everything in perspective – to first know where everyone is starting from, to then look at what the end-goal is coming out of Coronavirus times, to finally conclude with what we agree now for the immediate future in order to arrive there.
1. Beginning With Current Reality
Right off the bat, be clear on how the tenant’s business is suffering. Of course, this will be severe, but in what way?
How badly has income, customers, and business been reduced. And as a business model, what’s the knock-on effects.
So, with one reported incident of a taxi business renting office premises, it wasn’t
necessarily the drop in business that was the issue, as surprisingly people were still booking taxis albeit on a reduced scale, but their drivers didn’t want to risk driving and being exposed to the virus.
Plus, are there other sides of the business or branches that are doing better or worse in order to balance things, and who are the decision makers.
Also, how is cash flow, as even with good-business still showing on the books, with low cash in the bank, high stock costs, and slow customer payments then a business may simply not have the money to pay the rent cash-flow wise.
Also, consider what stock a business is carrying, and what overheads there are still to pay.
Small gift shops are in a double-whammy situation at the moment with no substantial increase in business even out of lock-down as people focus more on lifes essentials, plus they are carrying a lot of seasonal stock for mothers day and Easter which requires costly replacement for autumn or winter ones.
Each business will have its own unique story, which must be unearthed.
You then need to make sure businesses are making the most of how the government is helping them, which will include landlords themselves as a business interest.
In simple terms, the payments under a lease are still due even with the current pandemic, with government support not directly reducing or stopping this but rather supporting businesses in other ways in order for them to continue paying business costs like rent.
Such government support includes:
• Business rates being knocked-off for a year for some businesses
• Grants of up to £10,000 for businesses with Small Business Rates Relief
• Government loans including the new Bounce-Back scheme for up to £50,000
• Staff salaries covered by the Furlough scheme
• Various tax liabilities being deferred.
Now although these are becoming more familiar with, the secret is in the detail.
It’s essential to drill-down and see how this applies to every business, and how they are actually applying for this and waiting for any feedback.
This may be more complicated for some businesses set-up as say a self-employed
Individual or a charity.
So, if you take an example of a small shop or office being used as a media company. On one side, things might be very rosy – they are a small business securing a grant, have low stock and overheads, have placed staff on furlough, and still have regular website-design work remotely based.
In short, they can pay the rent, and may just require some time to pay this.
However, if they’re much larger and rely upon paper print work, then grants and even business rates savings may be less. There may be lots of stock issues, and little prospect of easily re- developing business for say flyer and brochure printing. Therefore, this might me more a discussion about sliced-down rent now.
2. Looking at the Future Outcome
Although tenants will understandably struggle to even look beyond the end of the month at the moment, it’s important to at least attempt this.
It will help to cut the chase, in a friendly way, and simply ask where they honestly think they will be in six to twelve months time lets say.
If you’re in a genuine dialogue (ideally over the phone at his stage) and have already got to the bottom of what the current reality is as above, then this should be a natural progression as both landlord and tenant try and see where things are heading.
For say small retailers, with all the best will in the world, they may not be able to survive this outbreak. For others like hairdressers then it may look rosier with less overheads and stock to eat-up government monies, and people hopefully queuing up soon for the hair cuts afterwards with a loyal customer base to build back on (social distancing permitting).
If there are issues with future survival, then the next stage is to ask what would it take to make it – if anything.
So, let’s say the rent was halved for the remainder of the lease, would this help. Or if they handed back some space, could this be more manageable, for example with offices now realising that there can be a mix of remote home as well as office working.
Plus, are there other areas of the business that can be focused on to move things forward, for example an online offering, or sharing space with other businesses.
They may also need to look at re-structuring the business, even re-launching under a new name also a slimmed-down version.
What you could also introduce into the conversation is up-and-coming lease events like rent reviews, break clauses, and lease renewals. Although maybe a year or so away, it can be worth discussing now in order to see what the prospects are of agreeing these.
In short, you’re trying to take a step back and have a moment, out of the box, blue-sky thinking. Almost going by gut instinct at this stage, without getting bogged down with any complications.
3. Ending with What Happens Going Forward
The final stage is actually looking at what middle-stage steps everyone needs to take, now that you know what the current reality and what the end-goal is.
This is working on the understood principle that rent and lease costs should still be due with government support elsewhere for a business, however, addressing these lease costs if the unique circumstances of today and tomorrow dictate so.
Landlords and tenants may agree to disagree at this point and take hard-line approaches as with a lot of larger landlords against corporate retail tenants who are refusing to pay any rent and yet arguably still open and trading to some degree either literally like discount stores, or online bookmakers.
The government has stepped in to halt any forfeiture action until the end of June for due rent and other monies for main and sub-tenancies under the Landlord & Tenant Act 1954, however, other breaches can still work, and this is only delaying action.
In some cases, landlords have been looking at winding-up orders against such tenants in order to keep the pressure on.
If there’s more of an open dialogue between landlords and tenants, then the first stage is to look at simply delaying the rent payments as a form of holiday.
A common one with the popular quarterly payment due at the end of March is to agree a 50% reduction until the end of June, to then review and agree a payment plan over time.
Such payment plans need to be clarified and agreed in writing as soon as possible really, with detail like any interest being due, what happens if these are not met, and how it would be paid if the lease did naturally end or broke before then.
Or alternatively, quarterly payments could be made on a monthly basis to help pay them bite-size and ease cash flow. If they’re already on a monthly basis, then simply making them due at the end of rather than the beginning of the month gives another month’s grace on cash flow as well.
Plus, don’t forget other costs like service charge and insurance premiums that sill need payment. Okay, they may be less important now, but somewhere along the lines they will be.
These other sums may also be practically paid into separate bank accounts, therefore be clear on how payments are allocated in these times to avoid confusion.
But if this isn’t cutting the mustard and actual rent reductions do have to be agreed, then make sure these are fully understood. Rather than say a 50% cut now, could 10% could be sliced off the next year’s payments instead.
Plus, see what a landlord could be fairly compensated for in order to accept lower rents, for example agreeing a longer lease term now.
Also, if any new lettings and lease renewals are currently in legals and being agreed, now is the time to tweak clauses for Covid-19 scenarios like delayed starts and specific reductions and insurance cover for this.
Getting Commercial Property Rents Resolved
For commercial property tenants, the bottom line is that they still need to pay the rent as prescribed in the lease, irrespective of unprecedented and hard-times being experienced. The government is supporting businesses in other ways, meaning that they should theoretically be able to then pay the rent at some point, even if not straight away.
But, of course, reality is often different. Therefore, look at what the current situation is before seeing what the future holds, and how business occupiers are then going to make it through these uncertain times.
And then end with dialogue by coming up with a workable-solution for everyone, after all, no one is immune from consequences at these times.
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