COVID-19: Rent support in the REF market

In the latest of our articles considering the impact of the COVID-19 outbreak, and Government policy in response to the pandemic, we consider the potential implications on banking facilities of the growing calls for cross-sector measures to support landlords and tenants, including the #NationalTimeOut campaign.

Rental incomes down

The effect of the COVID-19 pandemic, and in particular the Government’s 'lockdown' policy, on rent collections have been widely reported, making their way beyond the industry press and into mainstream media. Coupled with the temporary ban on forfeiture effected under the Coronavirus Act 2020 and the Government’s move to ban the use of statutory demands and winding up petitions until 30 June 2020 and to restrict the use of Commercial Rent Arrears Recovery (CRAR) within the same period, the effect of reduced tenant receipts is expected to heavily impact commercial landlords' cashflows.

The retail and leisure sectors were amongst the first to be impacted by the COVID-19 outbreak and have, arguably, been hardest hit by the Government response. It is estimated that on the March quarter day, rents received from tenants in the sector were approximately a third¹ of contracted rents (compared to approximately 60%² across the commercial real estate industry) and the picture is expected to worsen at the June quarter day. Although it is expected that most tenants will, where possible, pay whatever rents can be paid, many commercial landlords are, clearly, concerned that the measures taken by government to assist tenants leave landlords vulnerable and without protection.

Clearly, the financial packages announced by the Treasury, including the staff 'furlough' scheme, business rates relief and most recently the CLBILS, are expected to provide some degree of support. Nevertheless, it is anticipated that these measures may still not be sufficient to keep some businesses afloat and there are reports of up to two-thirds of small operators expecting to be unable to survive a further 3 months of lockdown.

Many businesses, therefore, are already in discussions, where possible seeking to avoid reliance on the ban on forfeiture, moving to monthly rental payments or, in some cases, agreeing temporary reductions in rents.

Impact to banking facilities

As we have discussed in previous articles, a shortfall in rents received by a commercial landlord is likely to lead to issues in any property-backed banking facilities, potentially impacting upon financial covenants and, ultimately, servicing the loan. The Government’s temporary bans on forfeiture, statutory demands and winding up petitions combined with the restrictions on CRAR have the potential to exacerbate this issue for landlords. In response, there has been increasing proactivity, from both lenders and borrowers, to mitigate these issues with steps such as covenant holidays and amortisation/repayment deferrals or waivers and consenting to arrangements made between landlord and tenant. Some businesses are also considering whether they might need a Company Voluntary Arrangement (CVA) in order to agree a collective compromise with its unsecured creditors.

Possible protective measures

Although these bilateral conversations (both landlord-tenant and landlord-lender) are likely to result in the most appropriate form of 'solution', there are numerous calls for industry-wide measures, including:

• Rent abatement (including the #NationalTimeOut campaign); and
• Rent support.

Rent abatement

Several options being presented focus upon a national imposed rent holiday whereby no rents (or only service charge) will be payable for a period of time. One such proposal is that put forward by Hospitality Union with support from chains including Burger King, Pret A Manger, Gordon Ramsay Group, Prezzo, Caffè Nero and Nando’s. Under the proposal, business tenants would be given a 9-month rent holiday (with such period potentially being tacked on to the end of the lease). Such a measure has further been supported in respect of the hospitality sector with suggestions of a nationwide default to a fixed rate turnover-rent position until like-for-like sales figures return to their pre-pandemic position. In each case, such rent-free period would be coupled with a 9-month holiday on capital and interest payments under any loan facilities secured by the secured premises.

Clearly, unless centrally imposed by Government, such a measure would require agreement of lenders. Whilst clearing banks may be able to support, for a fixed period, a suspension of amortisation and rolling-up of interest, other lenders may find such measures more difficult. Institutional investors and other lenders with back-to-back funding arrangements or obligations to maintain returns on investment, in particular, may find such measures more difficult to accommodate.

Rent support

In the alternative, the Business Property Federation and other bodies have suggested a 'rent support' model (the Furloughed Space Grant Scheme, FSGS) – similar to that adopted in Denmark and Sweden – whereby Government would provide payments in lieu of commercial rents (either to the occupier or directly to the landlord), potentially through an expansion to the existing CBIL and CLBIL schemes.

Any such policy would, clearly, have wider-implications not least in terms of the scale of the national debt figure, but would likely be more welcome relief to landlords and lenders.

It would be important to understand how any such 'income' would be treated for the purpose of facility agreements, in particular in relation to the testing of cashflow covenants.

Whatever measures are eventually put in place, it appears likely that further support for the real estate industry, and particularly the retail and leisure sectors, will be needed and it is inevitable that such measures will impact upon the lender-borrower relationship. As ever, key, in our view, will be the dialogue between the parties – whether to agree specific arrangements or to consider the impact of an industry-wide policy.

For more information speak to Katie Allen or Alistair Rattray.

¹ In its report, 'Covid-19: UK retail & leisure insights Vol 3 (as of 31 March 2020)', Savills reports retail, F&B and leisure rents of 38% and Knight Frank, in its publication 'Covid-19 What we know, what we expect, what we question' of 24 April 2020, estimates 33% receipts in the sector