Covid-19: Landlords and tenants – who takes the pain?
WRITTEN BY Howard Morgan
POSTED ON April 29, 2020
Roundtable discussion hosted by Goodman Masson – 28th April 2020
RealService Founder and MD, Howard Morgan was invited by financial recruitment specialist, Goodman Masson, to host a roundtable discussion with leading CFO’s and FD’s in the hospitality and restaurant sector.
With well-known operators like, Travelodge, making the headlines and the battles lines being draw, is there a better way to align the interests of owners and operators?
Here are some top tips for avoiding conflict
- Talk about the whole package
Hospitality industry CFO’s were clear that the landlords that they were making most progress with are the one’s who are willing to look at the whole package. That means not just the March 2020 quarter’s rent but also the June and September quarters, service charges, monthly rents, turnover caps and the basis of rent calculation. Those landlords who recognise that “we’re in it together” is more than a slogan and actively engage in understanding the operator’s business and constraints will make the most progress.
- Look at each other’s break points
CFO’s are pragmatists and recognise that both parties have break points. Those break points could for example be linked to external funding commitments. Recognising and being transparent about these constraints can save a lot of time. Honesty is the key – this isn’t a time for gaming and hiding behind smoke and mirrors.
- March quarter rent
Not everyone sees the withholding of rent at the March quarter day the same way. While most hold the line “we can’t trade, we have no income so how can we pay rent?”, not all agree. One FD told us that they do not believe that landlords should be denied the March rent as it was neither the tenant nor landlords fault that the lockdown was brought in. This FD took the view that withholding the March quarter rent set the discussion about the future financial relationship on the wrong footing.
- Be clear about language
There is a lot of new language being bandied about and FD’s told us that it’s important to make sure that both parties have the same understanding. Deferment, holiday, freeze, suspension, credit, waiver, abatement, concession, discount, reduction can mean different things to different people. Take care to define terminology.
- Don’t lose sight of our commercial reality
FD’s were keen to caution landlords about the speed of restart. “It’s going to take time to restart operations as the lockdown is released and its could be 6 – 12 months before the new normal is reached” said one FD. In the meantime, the viability of operating restaurants or leisure venues under social distance rule is likely to be marginal. “Just because a unit has reopened, don’t expect the pre-covid rent to be immediately affordable”. One FD warned that “if landlords are greedy, it’ll make more sense for us to keep a unit closed”.
- New operating formats
Hospitality operators are actively looking at new formats that will allow them to reopen and maintain their brand presence but comply with social distancing regulations. Expect to see coffee shops operating on a takeaway only basis and leisure operators to reduce the density of customers. The view was expressed that high street stores are far more likely to open first rather than those in a managed shopping centre environments.
- Fixed rent v turnover
CFOs see turnover rents as an essential element of the future leasing model. Most recognise and accept that this will lead to more involvement by landlords in their businesses. Some are wary saying “It will also put pressure on our already stretched finance departments. We don’t need more complexity now”. For a business with say 600 units across the UK, the thought of renegotiating leases from fixed to turnover and potentially running each on a difference turnover percentage is daunting. There are lessons from the airports and stations where true turnover rents are well established.
- Proceed with caution
One COO told us that he had decided not to enter into any written variation agreements with landlords until it was clear whether the Government would be offering any further support for the landlord and tenant relationship. There was wide support for pan-industry initiatives to win government support for a rent furlough scheme.
- Pandemic clauses
CFOs are starting to think about how they can build clauses into lease agreements which reflect the possibility of further lockdown waves and whatever comes next after Covid-19. They express the view that landlords and tenants will want to introduce force majeure clauses.
- Don’t press the nuclear button
A final word of caution. FDs warn those landlords who are not willing to engage from pressing the legal nuclear button. They say that contrary to perceptions “we are not being showered with cash by the government”. This is not a time for heavy handed action like winding-up petitions. “Hospitality operators have long memories and will want to work with owners that they trust” warned one FD.
Focus on the future
So what are the final messages from CFOs and FDs for landlords?
“Look at the long term, be flexible”
“Don’t just talk partnership, bring the words to life”
“Accept the reality, the March quarter has gone, let’s focus on the future landscape”
RealService would like to thank Paul Goodman of Goodman Masson for inviting us to chair this event.
If you would like to discuss any of these themes, or understand more about the ways that RealService can equip you and your teams with the insights and skills to operate in the Covid-19 era, call Howard Morgan