Business Interruption Cover Should be Solving Landlord and Leaseholder Gridlock
Many negotiations between leaseholders and landlords are stalling in the fallout of the COVID 19 crisis lockdown. Many tenants, especially in the retail and hospitality sectors are asking their landlords to provide mitigation against any future scenarios that would have a similarly debilitating effect. Risks that could result in a total inability to trade include catastrophic cyber-attacks on a national, widespread power grid failures and further pandemics. Finding a resolution to this issue will be crucial too for the UK’s economy going forward and the insurance industry alongside Business Interruption Cover should be playing a central role.
You might think that few property deals will be happening at the moment but commercially attractive locations remain in demand. However, the key question as to what would happen in the aftermath of another lockdown is proving a bone of contention for both parties.
Amongst proposed solutions to the issue, is the suggestion that landlords confirm rent free periods should further restrictions be imposed that would prevent the premises being used. Office based businesses are unlikely to be pushing as hard for these concessions as although they would still be affected it would be to a lesser extent in most instances, as their operations do not necessarily rely on footfall and after all that’s gone on in 2020 they should be set up for remote working.
Landlords are understandably loathed to grant carte blanche requests for rent exemptions during lease negotiations as they would no doubt prefer the option to examine each circumstance on its own merits. Leaseholders, on the other hand, will be unwilling to proceed with the exchange of contracts without significant reassurances. Given recent events, their caution is entirely understandable. The threat that this deadlock poises to the economy is monumental.
Without companies taking on new premises, there will be no new employment, no new fit out contracts, no additional VAT payments, no profits to tax, as well as an issue that has wider consequences than many realise, no new rent payments. Managing Director of Plan Insurance Brokers, Grant Georgiades highlights a common misconception regarding landlords and their rental incomes,
“It’s easy to think of landlords as the bad guys and retailers as the underdogs in this battle, which is true in some cases. However many of our high street chains are now owned by private equity backed by overseas money. And in reality, a lot of large property developments are funded and owned by pension firms, so it’s our own retirement plans that will be affected adversely. In fact, the British Property Federation estimates that 45 million savers and pensioners rely on the UK’s real estate markets.”
Recently former FTSE Top 100 firm, Intu Properties hit the headlines as it fell into administration. With debts of more than £4.5bn, its collapse was clearly not all of Covid-19’s making but the demise of the company made the consequences of lockdown, which left large numbers of retail and hospitality tenants struggling to meet the terms of their leases, all the more evident. Intu’s assets comprise 17 shopping centres across the UK and it employs nearly 2,400 people. Clearly, the knock on effect of its failure will be felt greatly by the wider economy.
So, what potential solutions are there to the issue of rent payments during another lockdown?
- Leaseholders and landlords could reach an amicable compromise. For example, they could agree to meet in the middle with a 50% rent reduction period should any of the events outlined above and potentially further unforeseen (without sounding overly melodramatic) disasters unfold? This is fine if both the leaseholder and landlord feel that their company will have sufficient liquidity to survive another doomsday-esque scenario? If not, the retailer faces extinction and the landlord is likely to be left as a creditor with significant bad debt on its books.
- Landlords, especially in the retail sector, could be moving towards rent based on a percentage of their tenant’s revenue. This means they’ll share in the good and bad times alike with landlords effectively becoming partners in a joint venture and both parties having a vested interest in its sustained success. A seemingly great solution, though a landlord’s business model will become that much more involved and income as well as cash flow will be incredibly difficult to anticipate. There will potentially be greater upsides in the good times and more substantial losses during downturns. These ebbs and flows could be highly challenging to manage. Also, tenant vetting processes will be even more crucial. Therefore the examination of business pitches and forecasts could be hugely complex and time consuming for both sides. There is potential for negotiations to become more onerous and covenant restrictions placed on the business by landlords to protect their interests may end up hamstringing the company’s efforts to prosper.
There should also be a third option. Previously a simple answer to the issue could have been Business Interruption cover. However, leading insurers are currently in the high court defending their decision to reject a large number of Covid-19 related business interruption claims. The FCA is pursuing a test case against them to determine the validity of their actions. Therefore it is unlikely that insurers are going to have much appetite to step into the breach and resolve the stand-off between tenants and landlords by supplying a simple to comprehend policy wording, that would take effect in the event that the business in question is unable to operate following a future pandemic or other disasters with similarly severe effects. In any case, given the battering, the reputations’ of these insurance companies have taken its doubtful that many leaseholders or landlords would put much faith in the protection the policies provide.
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