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by | Feb 1, 2021 | Business

What the rent moratorium really means for independents.

There may be rent moratorium in place, but what does that really mean? Does it offer the protection for tenants that we’re led to believe? I’ve heard some real-life horror stories from the Liverpool City Region recently which paint a very different picture of the reality being faced by some of our local operators.

How about the new hospitality business established in early 2020, who – despite not being eligible for most financial support – still managed to pay their rent in full every month up until December. They missed one payment in January and their landlord threatened them with eviction, told them they would forfeit their 3-month deposit and subsequently threatened to sue them for early termination of their lease.

Or the hospitality business, who despite being unable to trade for almost half of 2020 were still being hounded by their landlord for rent exceeding £10k a month. They subsequently incurred significant business and personal debt just to satisfy their landlords.

What about the small café whose landlord (illegally) changed their locks and repurposed their building with everything still inside, leaving them with nothing.

For every one of these stories, unfortunately there are a hundred more. Despite the moratorium, some landlords are still threatening and intimidating their tenants on a daily basis.  Meanwhile we’re hearing that some of the big chains have not paid a penny in rent since the moratorium started, despite relatively positive trading conditions… Is this because they also have their big corporate legal teams behind them, I wonder?

The numbers are clear. Pub, bar and restaurant tenants across the UK paid just 23% of their rent in the final quarter of 2020 as sales were decimated by government-enforced restrictions in the run up to the Christmas trading period. Meanwhile, retail shopping centre landlords received less than half of rents during the same period.

No one expects landlords to bear the full brunt of the pandemic, but for businesses who have not been able to trade for almost 12 months now through no fault of their own, it’s fair to say that a good landlord will share the burden and want to help find a long-term solution. Unfortunately, if this pandemic has shown us anything, it’s that good commercial landlords are few and far between.

With the current rent moratorium set to end in March and rent arrears continuing to mount for small businesses, we desperately need to rethink the traditional rental model if our independents are to have any chance of survival. So where should they start?

The first conversation needs to be a renegotiation of the existing lease and rent, taking into account a structured repayment of arrears. It’s not fair to expect a business that has had zero revenue for almost a year to be able to pay their rent arrears in full on the day the moratorium ends – and it’s just not going to happen. Landlords and tenants need to sit down at the table together and work out a plan which allows the business to get back on their feet. Open book discussion where landlords can fully appreciate the costs of running a hospitality business – utilities, rates, staff, marketing and food costs on top of that all-important monthly rent – are one way to rebuild the trust between both parties.

Where do we go from there? Well, there’s been a lot of discussion around turnover based rents, where the landlord takes a percentage of the tenant’s gross monthly turnover instead of a more conventional fixed rent payment. This is a common model in Europe, and for landlords who are less willing to share the risk a turnover rent can even be combined with a fixed base rent to guarantee a minimum level of income each month. In this way, the landlord shares in the success of the business as well as any hardship it may face.

However, it’s worth noting that giving landlords a vested interest in the success of your business can lead to potential relationship problems further down the line… Particularly if your landlord also fancies themself as an operator. You may just find yourself with the not-so-silent investor you never wanted! Tenants should also be cautious of landlords who offer to wipe out debt in return for a share in their business – whilst this might seem like a very attractive solution in the short term the operator should also be mindful of getting a professional valuation for their business before agreeing to any terms so as not to sell themselves short.

If your landlord is not willing to share the burden with you in the long term, then consider asking for a step rent (also known as step-up rent or step-up lease). This means that your rent increases according to a defined schedule as you get your business back on its feet – for example you may start at 50% of rent for the first quarter you trade, with this increasing every quarter until you reach 100%. At this point you will have 18 months of trade behind you and the future will no doubt seem a lot brighter.

And a note for those landlords who are still threatening evictions and forfeitures… There is no magic queue of new tenants ready to take these empty spaces off your hands. It will be years before the high street fully recovers, and you will be far better off in the long run trying to find an agreement with a strong existing tenant than forcing their business into bankruptcy.

This opinion article does not necessarily represent the views of Foursquare Group as an organisation.
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