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The changing face of landlord/tenant relationships
Alex Cadwallader and Dane O'Hara from Leonard Curtis talk about the recent shift between landlord and tenants and a new mood of collaboration to sustain business viability on both sides.
Dealing with commercial landlords of distressed businesses has always represented a challenge for directors and insolvency practitioners, especially in sectors such as retail and hospitality where businesses have been reliant on their trading sites, and by extension their landlords, to trade successfully.
Historically, commercial landlords have held a strong position at the negotiating table when approached by tenants that have fallen on hard times. In desirable locations, re-letting a unit after the insolvency of a tenant did not represent a significant issue, as demand for these properties remained high. This led to a culture of upward only rent reviews and the negotiation of ever increasing market rents, with tenants left with little option but to accept such costs if they wished to retain high footfall locations.
Having acted for many businesses operating in the retail and hospitality sectors, we have experienced first-hand the challenges encountered in trying to negotiate rent reductions or other lease variations to improve the viability of a clientes business and avoid formal insolvency. Until recently, landlords were relatively consistent with their response.
A recent shift
Recent years have seen a shift in the dynamic between landlords and tenants. Consumer preference for online shopping has increased year on year and footfall figures, even in the most desirable of retail locations, have fallen. This has led to a number of well-known high street retailers and restaurant chains suffering financial hardship as costs of stores continued to increase whilst the income either plateaued or fell.
The answer to this situation for many businesses is to try and reduce the Companyes portfolio of trading sites and refocus its resources on online sales or more profitable locations. The fundamental problem with this approach is the significant costs associated with breaking lease commitments which, in many instances, extend for years beyond the point that a site is considered commercially viable. Businesses are invariably left with an impossible decision continue to trade loss-making sites which may ultimately render the business insolvent, or vacate those sites and crystalise landlord liabilities that would also render the business insolvent.
Growth of CVAs as an effective restructuring tool
The above scenario ultimately led to the growth of the Company Voluntary Arrangements (CVA) as an effective tool for restructuring businesses with significant and unviable leasehold property portfolios.
The ability of CVAs to force such changes on landlords has been heavily criticised by landlords and subsequently examined in a number of high profile Court cases, the stand out case being the 2019 ruling in the matter of Discovery (Northampton) Ltd -v- Debenhams Retail Limited. The principal takeaway from the Debenhams case was that the use of CVAs to restructure and rescue insolvent companies by varying lease terms is a valid approach, so long as the CVA does not unfairly prejudice the rights of landlords when compared to other classes of creditors and, importantly, does not seek to remove certain proprietary rights such as the ability to forfeit leases.
The period following the Debenhams ruling represented a very difficult period for landlord driven CVAs and restructuring discussions in general. Whilst the various ongoing challenges were largely unsuccessful, this did little to improve the perception of CVAs amongst commercial landlords or their appetite to consider renegotiation of lease terms to address potential tenant insolvency.
A new norm
When the Covid-19 pandemic resulted in the first national lockdown on 26 March 2020, many businesses in the retail and hospitality sectors were forced to close their doors. Over the course of the three national lockdowns in the UK and a significant reduction in overall consumer footfall, many businesses were left unable to meet their rent commitments.
Thankfully, commercial landlords now appear to be much more receptive to negotiating agreeable settlements, both on an individual basis and via a properly constructed CVA. In the current climate, the principal objective for landlords now appears to be strongly focused on maintaining occupation where possible, even where this requires the compromise of arrears or meaningful rent reductions moving forward.
Landlords are now also facing challenges resulting from altered working practices and a fall in demand for office space in general, compared to the pre-pandemic period.
This has often left them with two options when dealing Covid-19 rent arrears work with the existing tenant or take the risk of an empty property to find a new one. Stick or twist?
Should landlords stick or twist?
We are seeing more and more landlords jump at the chance to stick, so work with their tenants to find a solution which in some cases has meant forgiving all Covid-19 arrears.
The other option would be for the landlord to take steps to recover the site assuming a stronger tenant can be found in a challenging environment. The moratorium imposed upon landlords during the Covid-19 pandemic has now been replaced with the new arbitration procedure for the recovery of commercial rent arrears under the Commercial Rent (Coronavirus) Act 2022.
On numerous occasions we have been pleasantly surprised to see that many landlords have opted for the stick option. The stance of the landlords has pivoted a full 180 degrees in recent times.
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