How pub owners and landlords can work together to brave Covid-19

The term “unprecedented” seems to have been used an unprecedented number of times over recent weeks. It is almost as if we have never seen global pandemics or Coronaviruses before now which is, of course, not true. It is a black swan event perhaps, but certainly not unprecedented.

What is without precedent is the way in which it has been dealt with. Never before have pubs amd restaurants been forced to close. That has caused enormous cash flow problems for both landlords and tenants in the hospitality industry.

There have been a number of heroes and villains so far.

First, the villains. Some cast Johnson in this role, pointing to his dithering and delay. His polite request – in the manner of Sergeant Wilson from Dad’s Army – for us not to go to the pub if we didn’t mind awfully, caused a significant drop in business, leaving publicans and restaurateurs with no prospect of claiming under their

business interruption insurance, they say.
Next, the insurers who initially refused to make business interruption payments on the basis that closures had not been ordered by the government and then, when closures were ordered, they refused to pay out. This is being tested in the courts by a number of aggrieved policyholders.

Then along came an unlikely hero in the guise of the Pubco – normally viewed as the villain of the piece. Stonegate was the first of the Pubcos to announce suspension of rent and other payments. Many small independent brewers then announced cancellation of rent for three months. Tenants said that this was not enough though.

Cancelling or suspending the March quarter was helpful but, as the hospitality industry was unlikely to be operating by the June quarter date, and would then be severely hampered by social distancing rules when allowed to re-open, a nine month rent holiday would be needed if largescale permanent closures were to be avoided. We can now see that resumed trading will not be at anywhere near previous levels due to distancing measures.

Many shops re-opened on 15th June and the hospitality industry is being allowed to open in early July – subject to conditions. Let’s hope the sunny weather continues!

Against this background, rent has continued to accrue under tenancy agreements and remains unpaid in many cases. Many of the normal legal measures available to landlords have been temporarily suspended. CRAR has been suspended. The courts are not accepting applications for possession orders. Bankruptcy orders and winding-up orders are no longer available based on inability to pay debts due to circumstances arising from Covid-19.

The wrongful trading provisions of the Insolvency Act have been suspended so that directors can continue trading whilst their companies are insolvent without the risk of personal liability.  It is, of course, still possible to pursue a debt claim through the county court online. However, the prospects of successfully enforcing a county court judgment are perhaps more limited than normal. .

Landlords and tenants need to look to the longer term. Cooperation and openness will be the key to success. There are predictions of the biggest recession for three hundred years. Consumer spending will inevitably decline, even after we have all returned to some kind of “normality”, although that will be a very different “normality” to what we had before.

Tenants who refuse to cooperate now will find little sympathy from their landlords when restrictions are lifted and trading resumes. When court proceedings once again permit forfeiture of leases, possession orders, bankruptcy and winding-up orders and CRAR is again permitted for collection of commercial rents, landlords will not be willing to permit an existing debt problem to become worse. Landlords will, however, want to continue supporting the loyal tenant who has made every effort to keep on top of its obligations and who is willing to maintain its side of the landlord-tenant bargain in the long term.

The answer then is to talk and agree a plan for getting through the current crisis in as healthy a financial state as possible and remaining adaptable to future business challenges.
This can be informal or there may be a formal variation of the tenancy agreement. If done informally, it should still be recorded in writing so that there is no argument later about what was actually agreed. If in doubt, take legal advice.

Since this article was first published, the government has published its code of practice for landlords and tenants which enshrines much of this in a non-binding set of principles. It recognises that the effects of the virus will be with us for a long time. It recommends that landlords and tenants collaborate to agree a sustainable relationship. Tenants who can pay in full should do so (and it reminds us that government loans and grants were always intended to assist with rent and other running costs). Those who cannot should be allowed the time to make sure that their businesses can continue to contribute to the re-building of a shattered economy. It recognises that the hospitality and leisure sectors will have the greatest need for protection. The code is supported by, amongst other, UK Hospitality and the BBPA.

It sets out the following principles:

• Transparency and collaboration – economic partners, not opponents, acting in good faith
• A unified approach – including banks, utility companies and government
• Government support – grants and loans are available to pay rent
• Acting reasonable and responsibly – identifying mutual solution

In particular, it makes some practical suggestions including deferral, reduction or waiver of rent and interest on late payment, monthly payments rather than quarterly, and the use of rent deposits without a requirement for top up until trading improves. It also suggests that services should be managed properly to reflect reduced occupation and service charges reduced accordingly.

There are many operators who entered the lockdown with existing financial problems based on an outdated trading model or simply due to poor financial management. Those businesses will not survive. Indeed, some are failing already – Intu, for example. Using the Coronavirus as an excuse will not mask the deeper rooted problems in those businesses. I anticipate that the court system will be very busy in the autumn dealing with the aftermath.

The positive news though is that the best operators will be able to re-establish and grow their businesses with the backing of their landlords if a good relationship is maintained through these difficult times and that should now be the focus of everyone in the industry.

So, do you want to look back at this period and be viewed as a hero or a villain? Whether as a tenant doing the right thing and making every effort to pay your landlord with the help of government grants and loans where needed, or as a landlord extending forbearance and agreeing an affordable payment plan, rent holiday, or monthly rent following a resumption of trading based on ability to pay, and so on, it is possible to emerge from this “unprecedented” hiatus with a reputation for fairness and a sense of acting in the wider interest.