Occupiers everywhere are taking independent commercial property advice on how they can operate their business going forward in these uncertain times and how their commercial real estate overhead fits into their business plan during the COVID-19 pandemic.
The quarterly rents may have been paid or short term rental relief may have been agreed with the landlord. There are a lot of businesses that are “waiting to see” if the government protection from forfeiture for business tenancies (under s82 of the Coronavirus Act 2020) will be extended further before deciding what to do next. Some landlords are also waiting to see how things progress over the coming weeks before committing to a particular course of action.
Government legislation (in terms of help with business rates and protection from forfeiture) may have helped many businesses but there are still a huge number of business occupiers with years left on their leases that feel that their “Pre-Covid” rents need to be reduced for their business to remain viable.
What should businesses do?
The answer is to take lease advice on your commercial lease agreement from a specialist.
Irrespective of their current rent payment or arrears situation all business types are being asked to observe social distancing rules in the workplace and for their customers and visitors for the foreseeable future. This not only changes how businesses operate but it fundamentally changes the financial viability of a lot of businesses.
Rental payments that seemed to be at the right level at the beginning of 2020 may now seem unsustainable for a large number of U.K. commercial property occupiers. Properties that were historically fit for purpose may no longer be suitable and even if they are they may require significant physical changes to be compliant with government legislation.
This is an unprecedented situation for both landlords and tenants. This event is unlike the technology crash at the turn of the millennium and the financial crash of 2008. I worked in commercial property through both. People who say they know how this will turn out, how long it will last and when the property market will start to recover should be challenged. Everyone is struggling to see a clear path forward and no-one has a crystal ball.
What is clear is that this affects all businesses and is not limited to once sector. Office, Retail, Leisure and Industrial business tenants are all affected in one way or another and to varying extents and all should be getting lease advice.
Occupiers can’t be expected to have all of the answers and their time is best spent on what they do best – running their business. Landlords also have restrictions placed on them by lenders, shareholders and are also subject to financial constraints so cant be expected to shoulder all of the burden of this crisis themselves.
There are options however and all is not lost!!
Far from it in fact this firm is currently providing independent commercial property advice and assistance to businesses on a wide variety of solutions which includes:
- Negotiating short and medium term rent concessions such as a full or partial deferral or abatement.
- Negotiating landlords financial contributions towards tenant alterations or a tenant refit. Works may required to the business premises. These can be costly and securing a financial contribution from a landlord helps to ease the financial burden of the reconfiguration.
- Negotiating the surrender of lease(s).
- Navigating upcoming lease expiries to mitigate exit costs.
- Ensuring that occupancy costs are minimised to include Service charge, Business rates, Insurance and utilities.
- Exercising or leveraging break options (you may have seen the recent RICS talk that I gave on this subject).
- Partial or full lease disposal through a sublease, business sale or lease assignment.
- Lease restructuring via a deed of variation, surrender and re-grant or through a reversionary lease.
- Referral to insolvency specialists to advise on options such as administration, CVA, pre-pack agreements and liquidation.
It is worth pointing out that the number of commercial lease agreement restructuring scenarios available are vast, limited only by the parties imagination and the willingness of both the landlord and the tenant to find a “win win” solution to a shared problem.
The specific solution or solutions for you will depend on your business and the solution should align your property needs with your business plan.
Some of the options listed above can be pursued together initially with one or more dropping out as the situation changes ultimately leaving you with what becomes clear to you as the best option for your firm. For example you may progress down one route such as a controlled exit but decide to change track at a later date and pursue a lease regear. Alternatively on detailed investigation it may become clear that there are opportunities to leverage lease terms to your advantage in negotiations. Also there may be more than one solution to the problem. You may require a short term solution to see you through a set period of time with a further medium or long term solution also required to safeguard your business.
What ever your ultimate goal for obtaining workable solutions for your business it is imperative that you get lease advice and have a viable strategy and approach the landlord in a professional and co-ordinated and well thought out manner.
The scene is now set for landlords and tenants to engage in a meaningful, transparent and open dialogue.
Here are some tips for you or your advisor:
- When asking for help with the rent, consider asking for help for an initial period (however long you feel you can reasonably justify) to be reviewed at the end of that period. This way you avoid tying yourself into a set timescale which may not be long enough to keep your business sustainable. Landlords generally want to retain good tenants and will be concerned about downward market rental movement on any reletting, void periods and empty properties.
- Tell your landlord what you intend to do in return for their co-operation, even if it is just saying that you will keep the business solvent and start trading again as soon as it is safe to do so. Do you intend to make up any rental shortfall at a later date? Will you agree to add additional term on to the end of your lease? Are you looking for the landlord to simply forgo or credit the rent for a period of time? What the landlord is able and prepared to do to help you will depend on the landlord’s position.
- With the above in mind, consider your landlords needs and their situation when deciding exactly what to ask for. Many Landlords have loans and need to pay their lenders. Is your landlord getting help from their bank or the government? Has this been in the press or have you heard from other occupiers that they are getting help? Government may start encouraging leading banks to provide payment holidays for particularly affected landlords and so this situation is fluid.
- Consider your landlords position and what might work for them. Is your landlord a private individual that relies on cash income from rent each month to pay their own bills or are they a property company with high levels of borrowing or are they a local authority or pension fund facing shortfalls?
You will see from the above that there is a lot to consider and this is why we advocate getting independent commercial property advice from a suitable qualified and experienced professional and not trying to tackle this on your own.
In our opinion it is important to ensure that whoever you turn to for lease advice that you check the following:
- They have a verifiable track record of delivering lease consultancy advice to occupiers.
- They are a chartered surveyor with property market knowledge and have experience in negotiating rents, re-gears, rent reviews and lease renewals with landlords property agents. They will either have MRICS or FRICS after their name.
- They are able to provide examples of the lease advice work they have done and references/testimonials from clients.
- They don’t have a conflict of interest with your landlord(s) this is less likely if they mainly or only act for tenants or occupiers. Ask them if they have recently worked for your landlord or are expecting to work for them in the future.
- They put their service offer in writing and provide you with a fixed fee or capped fee for working for you and don’t work solely on a “no win no fee basis” which can in our experience result in a less than optimal result for the occupier.
- They are suitably qualified and have adequate levels of professional indemnity insurance.
- They can work seamlessly alongside your commercial real estate solicitor to ensure that that any alteration to your commercial lease agreement is suitably documented.
The key message to take away from this article is that if you face financial difficulties as a result of coronavirus, you should obtain independent commercial property advice as early as possible and not just rely solely on your solicitor or your in house team to advise you. By acting early you will have the best opportunity to be able to implement the option or options that are best for your business in plenty of time.