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With one quarter rent day just gone what looms for commercial landlord and tenant relationships?

With one quarter rent day just gone what looms for commercial landlord and tenant relationships?

‘Propertyweek’ the respected journal for property industry has reported that experts are predicting as few as 10% of commercial property tenants will pay their rent this quarter. The article, that subscribers can read in full, actually claims only 10% of rents will be paid. If we look at this another way maybe the prediction is for more tenants paying but only part of their rent? Time will tell. This second possibility would certainly make sense. With businesses hit hard from retail to office, and leisure to industry, paying some rent rather than all will help to pour oil on troubled waters between the historically fractious relationship of landlord and tenant.

Landlords need tenants, and tenants need landlords who will work with them. This is true of the current situation and also for the foreseeable future. Maintaining a cordial relationship can only help both sides in the long run.

The High Street has been on a downward spiral for many years and certainly since the credit crisis of 2008. Leisure and hospitality has fared no better as operators open and fail with concepts that consumers quickly tire of. Both sectors went into the covid-19 crisis with few reserves and rents that were based upon a performance that was impossible to achieve. The size and space in a unit  was used to calculate how many consumers could pass through the doors, and spend per head was the key to maximising the value for the tenant operator and by default the rent that could be paid to the landlord. Space remains key to the sustainability of a business, but with social distancing the value plummets as one consumer can take up 4 square metres. Compare this to 1 square metre and 25% of historical trade levels becomes a reasonable expectation.

A quarter of the turnover of a pre-covid operation sounds bad enough but with furlough and possible redundancy the experience of most customers, savings and overdrafts will have been delved into during the lockdown and expendable income must decrease at the very best for the short term.

Propertyweek spoke to many of the movers and shakers of the property world and has come up with some chilling quotes for our time:

When commenting on the low level of rent collections, Vivienne King, the CEO of Revo commented, “If that is the case, it will have severe implications for property owners, their lenders and ultimately pensioners and savers who rely directly or indirectly on retail property for income. These are unprecedented times, but despite the lockdown measures those businesses that can pay, should pay – and those property owners that can support businesses genuinely in distress, should do so. Whilst reinforcing the contractual obligation, this is what the Government’s Code of Practice expects.”

Robert Hayton at Altus Group thinks that the rent collected by landlords will be as low as 10% of what would be expected, “Occupied retail, leisure and hospitality premises in England have received a business rates holiday during 2020/21 worth £10.13 billion but landlords have largely been overlooked despite being asked to play their part by waiving or deferring rent to help their tenants survive. It is only fair that there is tax parity and that the rates holiday is extended to those properties vacant and to let.”

The importance of landlords and tenants working together was commented on by Melanie Leech, chief executive of the British Property Federation, “For any business that is concerned about how it is going to meet its rent obligations, I urge you to refer to the Government’s code of practice for commercial real estate, published on 19 June, as a way to engage with your landlord. Businesses in genuine need of support will find landlords wanting to offer what support they can, and a range of possible options in the code – including flexibility around rents and other lease terms could include moving from quarterly to monthly rent payments and providing rent deferrals or payment holidays, depending on individual business’ financial circumstances.”

No one will be the winner if tenants fail due to rent demands and landlords have to sell due to a sharp decline in  their returns. Some tenants think this is a golden opportunity to buy the property they rent and end throwing money down the drain when they could own the property. This is a naïve way to think as history has shown that this is not the outcome of such circumstances. If landlords find their only option is to sell the property  it will go to the buyer with the biggest and easily accessible source of funding. The result will be that the tenants still need to pay their rent but to another landlord. This new landlord, having bet on a certain level of return will not be as flexible as the existing landlord who can appreciate the tenants business and the relationship of landlord and tenant has already been established.

We should all be careful for what we wish for.

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mjdhughes

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