Earlier this month the government published its roadmap to ending the lockdown. It’s clear from the document that retail’s exit from lockdown will be slow and taken in phases.
Even when retailers are allowed to reopen bricks and mortar stores, they will have to contend with a dip in economic activity and a customer base that has become more hooked than ever on Amazon deliveries. Revenues won’t be returning to ‘normal’ for a long time. For this reason, many are looking at reducing the cost base of physical outlets so that they remain viable.
The biggest outgoing is often rent. A number of landlords and tenants have already agreed short term arrangements such as rent concessions and deferments to cover the lockdown period. But what happens after lockdown?
In a retail landscape where some trading is possible, but not enough to sustain rents at their pre-Covid levels, landlords and tenants will need to collaborate in order for both to survive. Over the past few weeks, Foot Anstey lawyers have been supporting a number of retailers and landlords in negotiations over rent – here are some of the things we advise thinking about if you plan to go down this route.
Creating dialogue with your landlord
Finding new tenants for retail space is going to be a challenge in the coming months, so it will be in most landlords’ interests for their current tenants to stay in place. With the UK now heading into a recession (hopefully a short one), this could remain the case for some time to come.
There is therefore mutual benefit in finding a solution that allows a tenant to stay in place and trade affordably and that should form the basis for dialogue. If retail tenants can broach the conversation by saying “we want to stay, but we need your help” they may find their landlords surprisingly receptive to this open approach.
Be clear about the problem you’re trying to solve
Retail tenants have to be upfront with their landlords. What are the best and worse case scenarios? Do you expect revenue to pick back up quickly, or are you looking at a sustained drop beyond the end of the current crisis?
Think carefully about how you communicate the problem to a landlord. On the one hand, if they believe you are facing a temporary setback in cashflow, they could be more inclined to offer temporary solutions like monthly billing which don’t really address long term issues with the lease.
On the other, if a landlord has cause to believe that you face insurmountable structural problems and are likely to cease trading soon, they may not want to negotiate at all, their financial interests being better served by the current terms of the lease.
Clear framing of the issue is therefore important – neither underplaying the issues with the lease, nor over-exaggerating them to try to extract more favourable terms.
Understand your landlord’s position
As a retail tenant you may be looking for a straightforward discount on rent. Your landlord, however, may struggle to agree to such requests in the medium term, especially if they need to be fair to multiple tenants across their portfolio who all want the same thing.
Consider what you can do to help them. Can you propose a lease extension in return for rental concessions, lessening the risk of vacant properties? Are there other ways to structure rent payments under a lease which may help them?
Take, for example turnover rent – whereby you pay your landlord a base rate of rent and a revenue-linked element – which is one mechanism that retailers are now seriously considering as they come out of lockdown. These arrangements aren’t uncommon in the sector and in the context of Covid-19, could provide a mechanism for landlords to accept lower payments now, while turnover is down, but then share in the profits later when the economy picks up.
Another option might be a step-up mechanic, where a landlord agrees to initially smaller rent payments that then increase at intervals specified in the lease. This has the benefit for landlords of certainty around when they can expect more revenue, but the drawback of not sharing in the rewards if tenants’ turnover picks up quickly.
Ultimately, if tenants and landlords show understanding for each other’s position and are both prepared to give a little, they will each stand a better chance of coming through the other side of this crisis.
Carol Phillips is a real estate lawyer and partner at Foot Anstey.