Landlords told flexibility is key to recovery in property sector

Landlords and tenants need to embrace greater flexibility in their dealings with each other if they want to keep their businesses in the best shape possible despite challenges posed by the pandemic.

The impact of COVID-19 on landlord and tenant relationships was under the spotlight at the first in our new series of property webinars drawing on the expertise of specialists from our property litigation, restructuring and insolvency, and commercial property teams.

Nicola Seager told delegates: “Unlike other recessions even well-run businesses have been badly hit by Covid-19, and going forward landlords will need to adopt a more flexible approach in their negotiations.

It remains to be seen if it will be possible to get rent deposits and guarantors on new leases – much will depend on sector and location – but better co-operation and communication will definitely be key for an enduring landlord and tenant relationship.”

Nicola Seager, Sarah Manley and Ken MacLennan engaged in a lively debate on the ramifications of the temporary coronavirus legislative changes introduced during the first national lockdown, in front of an online audience of 305 real estate investors, developers, insolvency practitioners, social housing providers, housebuilders and property agents.

“It is crucial to consider the future of your relationships with your tenants as these measures expire, because there are so many practical, commercial and insolvency considerations to take into account, and different options to consider,” Nicola said.

The speakers turned the spotlight on the significant number of company voluntary arrangement (CVA) proposals currently in play – where creditors seek to settle debts by paying only a proportion of what is owed, and increasingly reduce future rents, often seeking to base future rent on turnover – an approach which has not been received well by landlords.

Sarah Manley commented: “The use of CVAs to convert standard leases to turnover rent completely flies in the face of the government-issued Coronavirus Code, which confirms that tenants remain liable for their covenants and payment obligations under the lease (unless renegotiated by agreement with landlords).

Through CVAs, landlords are having turnover terms imposed on them – and this seems to be becoming the norm. And I think it is this fact – that it’s becoming normal – which is causing an upswell. It’s just going too far for many, and I think it is likely we will see the contents of one of these CVAs challenged.”

Many big names in the heavily-impacted sectors of retail and hospitality, including Edinburgh Woollen Mill, Clarks, Moss Bros, Pizza Express, Caffe Nero, Café Rouge and Ann Summers, have recently issued CVAs, all of which significantly prejudice landlords.

Nicola said: “Last year’s Debenhams’ case confirmed that future rent could be included within a CVA. The judge commented – albeit in a non-binding part of the decision – that ‘common justice’ and ‘basic fairness’ require that the landlord should receive at least the market value of the property he is providing. The issue was controversial and complex prior to the pandemic. Landlords are increasingly concerned that CVAs are being used to set market value rather than simply applying it as tenants outside of CVAs or insolvency insist on similar deals.

CVAs have become a very different beast to what they were originally designed to achieve – at least that is the perception of landlords – and many landlords simply don’t understand how a CVA can vary the terms of a freely negotiated lease against their wishes.”

The next webinar in our property series will take place on 21 January 2021 and will cover the property related highs of 2020 and look ahead to what 2021 holds for the property sector.

The property series webinars aim to cover a wide range of topical real estate investor and developer focused issues offering practical advice, insight and an open discussion of the practical issues confronting those in the sector.

To attend the next event, please contact Nicola Seager.