The economic upheaval caused by coronavirus brought an increased number of Tenants approaching their Landlords with rent relief requests, and we expect more of these requests in the next couple of days, weeks and months.
Although commercial Tenants are still liable to pay their rent, the UK government banned Landlords from evicting their occupiers who miss rent payments. The severity and rapidity of the combined demand and supply side shock, coupled with government instructions to size trading for all retail, hospitality, leisure and nursery businesses on Friday 20th March 2020 has quickly turned liquidity issue into a solvency issue for many Landlords & Tenants.
Despite UK government’s COVID-19 support for businesses scheme which includes measures such as 12 months business rates relief for all retail, hospitality, leisure and nursery businesses, tax deferrals, small business grants and business interruption loan scheme, the due dates for rent payment will fall prior to this being expedited. In addition, insurance business interruption discussions will take months to resolve.
On the other hand, for the Landlord having the Tenant defaulting on their rent means significant costs associated with voids (business rates, maintenance & service charges) and re-letting (agency and solicitors costs). For the Landlord it may be challenging to re-let the space given the current economic climate with restrictions on movement, an increased number of spaces coming on the market and businesses postponing their expansion plans.
These negotiations between a Landlord & a Tenant don’t need to be a zero-sum game, and there is an opportunity to agree a win-win scenario for both parties. So what can the Landlords and Tenants do to overcome this crisis? We proposed the following scenarios:
- Rent deferral with a pay-back schedule over the term until next lease event
- Rent forgiveness in exchange for a longer term
- Rent forgiveness in exchange for a rent increase
If structured correctly, the above options may be beneficial for both parties. For the Tenants it means reduced pressure on the cash flow which will help to survive this crisis. For the Landlords this agreement may positively impact on the capital value their asset with higher rent being capitalised to establish the value or stronger yield applied for a longer lease term.