Lease conditions may contain a cure for suffering retailers

The government enforced the closure of all bars, pubs, clubs and restaurants on 20 March and, as of 24 March, put the UK in an Italian-style lockdown; forcing people to stay at home beyond a small range of very limited circumstances. The immediate detrimental impact on the food and retail market is clear, particularly for small and medium enterprises (SME). James Palmer, owner of Rainbo and Katsutopia with four sites around central London, said: “All four of our stores have now closed indefinitely. Operating takeaway-only services from our stores is not viable for most small businesses either. We are working hard to encourage the likes of Deliveroo to reduce their commission fees during this period (typically 30-35%) but so far they remain unchanged. Our sole focus now is on survival, cutting every single cost we can while also helping and supporting our extremely vulnerable employees, and being in a position to still trade once things begin to get back to anywhere near normal.” Without sufficient packages, support or compensation (for landlords and/or tenants), the situation for the industry, particularly SMEs, could be catastrophic. Government life jackets? The government has offered retailers assistance in the form of £25k grant injections (subject to rateable value), a 12-month business rates holiday for all retail and hospitality outlets, government loans and a moratorium on forfeiture for non-payment of rent. Will these measures help and are they enough? There has been a mixed reaction. 1 Timing These measures should help many businesses at least weather part, if not all, of the storm, but the loans and grants are not available until the first week of April (at the earliest). Rajat Sood, restaurateur and owner of Woodlands, said: “We appreciate what the government has done but the banks have not been passed enough information and the process is too slow – our bank says it could take up to four weeks to get loans in our bank accounts.” It means that it might come too late for some smaller businesses which cannot sustain three-to-five weeks without trade. 2 Loans The loans will provide relief but the terms and conditions of those loans will need to be considered carefully. It is a loan, not a gift, and will need repaying. 3 Grants Although the grants are a great start, there have been issues with SMEs gaining the benefit, in particular those that sublet. The landlord of a retail park in the heart of London, for instance, pays the business rates for the entire estate, so subtenants don’t have a rateable value. The councils responsible for administering the grant, at present, do not know how the subtenants can claim the grant without having a rateable value. This needs addressing. 4 Moratorium On 24 March, the health secretary, Matt Hancock, proposed an amendment to the Coronavirus Bill (to be enacted shortly) whereby there is a moratorium for commercial lease forfeiture for non-payment of rent until at least 30 June (with residential relief already enacted, this amendment should bring the legislation in line for commercial premises). It is a great initiative and will save many businesses. But James Palmer said that it needs to go further: “Tenants having the security that they will not fail on their lease when the rents inevitably won’t be paid this week is a great start, but more must be done. If we are forced to close for three months but still have to pay the rent on the premises later this year (or even in 2021), then keeping our head above water once we reopen will be an impossible task for thousands of businesses.” However, it seems unfair to allow tenants a break but not landlords who have bank debts to pay. Hopefully the next step will be a similar form of “debt moratorium” to protect landlords from banks trying to enforce debt repayments, which they will be unlikely to meet if they’re not receiving the rent from tenants. Commercial retail leases The long-term impact on the food and drink industry of these measures remains to be seen but, either way, tenants and landlords are turning to their leases to see what, if anything, their lease can assist with. 1 Turnover rent Some retail leases have a “turnover rent”, whereby the rent payable by the tenant is determined by the turnover achieved by the tenant’s business from the premises. There are variables in this calculation: what is included as “costs”; how much of the turnover is included; and whether it is subject to a minimum rent irrespective of turnover. The variables and wording in the definitions will determine what impact coronavirus will have on the rent – and whether it impacts landlord or tenant. If the lease is subject solely to turnover, then the tenant will be in a better position in terms of rent payable. However, if the turnover rent is subject to a minimum rent irrespective of the turnover, then the landlord will have the security of knowing it will receive a minimum rent (presumably which it negotiated at the outset as the minimum it needed), irrespective of the negative impact on custom by the virus. 2 No turnover rent For those tenants paying a flat annual rent with no reference to turnover, the situation is even bleaker, as the effect of reduced footfall directly impacts on the location’s profitability considering the fixed cost rent does not alter, despite the reduction in revenue due to a reduction in trade. Force majeure to the rescue? A force majeure clause provides that, on the occurrence of a specified event, as a result of which one party is unable to perform its obligations, the contract can be terminated or the performance of the obligations delayed or suspended. Force majeure clauses are no longer common in commercial leases but older and long-term leases may contain one and so tenants and landlords should review the lease. Whether force majeure could be triggered by coronavirus would turn on the facts: the clause definition, coupled with the international prognosis (UK Medical Council and World Health Organisation) and the governmental procedures in place. For example, in the UK we are currently at a moderate risk with high risk for certain vulnerable people, the WHO has declared it a pandemic and the government has implemented a form of lockdown. Is this enough to trigger a force majeure clause? “Specific events” is aimed at natural or unavoidable catastrophes, although the clause should be checked. A pandemic is not a specific event but is instead associated with concerns regarding its geographical spread. As such, it is more an evolving state of affairs, and so it may be difficult to establish that coronavirus is a force majeure event. Other legal avenues If the negative impact were to continue and more draconian government intervention came into play, tenants could also consider whether there would be relief or recourse pursuant to: “uninsured risks” clauses in their leases; insurance policies; and/or more subtle common law duties that parties owe to each other. Although there is potential scope with these, it would seem less likely and advice should be sought from relevant professionals before taking action. We are all going through the same historic and unprecedented situation together, which cuts across every section of every market and every society around the world. Hopefully in these extraordinary times co-operation and rent/service charge holidays or suspensions are the solution, not litigation and forfeiture. Even without the moratorium, there seemed little point in landlords spending money chasing payments that can’t be made because of tenants’ inability to trade. Likewise, it did not seem logical to forfeit a lease when all this would achieve is the recovery of a property where the chance of securing a new tenant or doing anything else of value with the property must be remote. This should be balanced with the consideration of landlords who are subject to banks themselves, and how the banks seek to enforce repayments – a knock-on effect would not be beneficial for anyone. With the moratorium in place there appears to be some breathing room for now but, as Palmer suggested, is this kicking the can down the road? The long-term impact – more CVAs? The retail market has been suffering because of the rise in omnichannel retailing, particularly in the clothing market, and so the rise in company voluntary arrangements (CVAs) that we have seen over the last few years could continue as a long term effect on the food and drink retail market of the Coronavirus. Paul Olliff is real estate legal director at Ashfords