Coronavirus and its affect on tenants
Businesses being forced to “shut up shop” for a period of time, and/or the restrictions imposed on businesses during and after lockdown, has affected their ability to trade and generate an income. This has, amongst other things, contributed towards businesses not having sufficient funds to cover their outgoings, including paying rent to their landlords, or if they can pay rent (or part of it), businesses are taking an extra cautious approach before departing with any cash.
I am hearing “cash is king” a lot.
Businesses have had assistance from the government, whilst helpful, but only to an extent, and perhaps in some instances, only delays the inevitable of a business having to cease trading.
The effect on landlords
Landlords have the pressure of needing to comply with their own obligations, which may include banking covenants, and to generate an income to their shareholders. Landlords have also had their hands tied to try recover their properties, or recover rent arrears or other sums due under their leases.
This is frustrating landlords where a tenant who refuses to pay rent or engage with the landlord, and a landlord has few options available to resolve the issue.
Save for a couple of exceptions, a landlord’s only realistic current option to recover arrears is through the courts by way of a money claim. The risk of taking this approach is that an order from the court is only worth getting if the company who has the judgment against them has the means of satisfying the judgment. A landlord could risk throwing good money after bad.
Seeking to recover arrears through the court may push a tenant to a point where it is unable to continue trading, and a landlord has little prospects of having its judgment satisfied.
The government’s guidance
The government’s guidance is, in essence, to encourage landlords and tenants to “work together”. This may give little confidence to a landlord, or to a tenant, especially when relationship between them are already tense.
I have, however, seen situations where landlords and tenants who have opened a dialogue, are agreeing arrangements which helps each other. This may be in the form of a rent concession of some description, for example, waiving part or all of a particular quarter’s rent, or to allow a tenant to pay its rent monthly to allow a tenant to manage its cash-flow.
The situations where a constructive dialogue is not taking place seems to be where a tenant was struggling prior to the lockdown measures in March, and their situation has become increasingly worse as a result of the lockdown and the subsequent restrictions imposed on businesses – or where the pre lockdown relationship between the landlord and the tenant was already strained .
Offices and working from home
Many people, including myself, have worked from home during and after lockdown, which has resulted in many offices being empty. This raises the question as to whether or not the cost of having an office is necessary if people can work from home.
Whilst working from home has its advantages, working from home can be isolating and distracting despite having “zoom” or “teams” calls (throw back to Professor Robert Kelly’s interview on BBC News when his child and wife entered the room during the interview!).
Working without your team (and the camaraderie that goes with it) and the general chit-chat that goes on when making a coffee between teams in the same business, will inevitably make a parts within a business feel disjointed.
Businesses are needing to pull together even more than before in order to provide its service to its customers and clients. Having an office is an integral part of that operation.
The amount of people working from home may increase as a result of lockdown when compared to those who did before lockdown, it remains to be seen whether this removes the need of having an office.
It is possible that the economic picture may get worse before it gets better, especially when furlough ends, and the restrictions surrounding a landlord’s ability to present winding up petitions and/or forfeit leases comes to an end.
Ultimately, a landlord will not want to have an empty shop or unit, but I suspect we will see more empty shops on the high street and elsewhere as time goes on. However, on a more positive note, this will in turn create opportunities for independent retail tenants and pragmatic landlords who are willing to work together to try something new.
Businesses are faced with difficult decisions to try to keep their business viable and try navigate its way through this depressed economic climate.
I suspect we have not seen the full effect of the Coronavirus and the government’s response to it has had on businesses, and the market will continue to adjust accordingly.
Tenants may have stronger bargaining power when entering into new leases, or renewing their existing lease, with the possibility of “covid” or “pandemic” clauses becoming the norm in leases, which may allow a tenant to defer, or not be liable to pay, its rent if another lockdown is imposed.
There are causes for long term optimism though. Those landlords and tenants who have together successfully navigated their way through this challenging time will look forward with hope. If consumers habits permanently switch to “buying local”, then the opportunities will exist for start up businesses and independent retailers to offer something that will entice consumers back to the high street