Lockdown #2 – the key questions

To support clients and colleagues working in the Real Estate Occupier community, Shoosmiths hosted a webinar on 6th November 2020 looking at some of the most pressing issues impacting the sector in light of the unique challenges posed by COVID-19.

Introduction

Coronavirus COVID-19 is a crisis unlike any other we have faced as a country, presenting a new and varied set of challenges to UK and global business. Based on what you have told us is more important to you in the current climate we have devised a series of webinars aimed at you to look at implications. In this webinar we address some key questions following the imposition of Lockdown #2.  Below are our key tips and takeaways.

Introduction by Beth McArdle, Partner Shoosmiths LLP

• This webinar follows the second lockdown being entered into across England.
• The panel for today’s session is made up of Ruth Clare, Kirsty Black and Robin Mitchell, partners at Shoosmiths LLP and Dan Gazzard, partner at Morgan Williams.

Q: What are the government going to do to support businesses long-term and what are the arrangements to be regarding rate relief?

• Kirsty reports that the Property Management Association who represent retail occupiers, have written a letter to government to ask for the rates holiday to be extended further. Several retailers have signed this letter but please contact PMA if you would like to support that further.

Q: How can tenants and landlords work together to agree what rent levels would be fair to pay, and how do you negotiate this when you have no lease expiry or break to use as a tool for negotiation?

• Dan Gazzard reported that in his experience, those who have had the most success are those that have taken a collaborative approach and have been open and engaging with the other party. Regardless of lease expiry and break clauses, parties have been successful in reaching a compromise. Partnership seems to be the focus moving forward.
• Ruth states that it is a novel situation in that it is genuinely nobody’s fault. If you can approach the situation in a way that recognises the other party’s obstacles and concerns you are likely to be more successful. An issue for tenants may surround the sharing of business performance and projections with landlord’s in a way that they have been reluctant to do before, in order to demonstrate the impact that has been had on trade.
• Lockdown #2 seems to have brought more people to the table than it had done previously and is challenging a robust approach.

Q: If a concession was granted in respect of the first lockdown, should tenant’s attempt a second bite of the cherry?

• Ruth thinks so – if tenants managed to negotiate a position in respect of the first lockdown, even if that does not apply at present, it has set a precedent which may be relied upon.  Further, there are circumstances that may have not been considered throughout the first lockdown. For example, concerns regarding pipes freezing was not a concern throughout the spring and summer but has become a concern as we go into the winter. This provides grounds for approaching landlords once again.
• Having documentation readily drafted following the first lockdown means that, crucially, legal costs are being minimised.
• Dan reports experiencing a far better thought-through process and far less panic when compared to Lockdown #1.

Q: Are keep open clauses enforceable? 

• Ruth states that keep open covenants are generally unenforceable in England and Wales therefore whilst the Landlord may claim that damages result from the breach of this clause, this is not something we are overly concerned about.
• Beth adds that though turnover provisions sometimes include liquidated damages clauses, there are commonly carve outs of these provisions for circumstances that are beyond the tenant’s control which is an argument that we would run in these circumstances.
• Robin reports that the position in Scotland is that keep open clauses are enforceable. However, the lease will likely place an obligation on tenants to comply with statute which conflicts with the keep open requirement. From an occupier’s standpoint, Robin takes the view that the first obligation is to comply with statute, and this would make it very difficult for a Landlord to enforce a keep open clause.
• Further, if it was the Landlord that closed the wider centre, as opposed to the tenant, irrespective of the provisions of the lease there is no question that this would render a keep open requirement unenforceable in Scotland.

Q: Are we likely to see an increase in court proceedings regarding non-payment of rent?

• As seen in respect of Café Nero, it is likely this is to become the norm. The options for landlords have been severely limited in England and Wales. Forfeiture, petitioning for liquidation and sending a bailiff have been prohibited until the end of the year and are anticipated until at least March. Court proceedings are therefore the only route left available. Ruth reports that a strategy in respect of this was discussed during the PMA conference and is available online.
• The position in Scotland and the strategy being adopted is very different. Scotland does not have the same level of protections for tenants. Landlords are therefore more likely to use remedies such as arrestment of tenant’s funds and seizure of goods. This poses more difficulty for tenants.

Q: What is to become of the unused retail space?

• Robin reports from a Scottish point of view that this is very much not a new issue. If landlords are looking to re-purpose stores, they may need to go down the route of a full planning application. However, there are indications that local authorities are taking a more realistic view and are looking favourably on repurposing space.
• In England and Wales, the change to Use Class E has shifted the uses that Landlords may consider. Dan reports that in respect of out of town retail, much quicker decisions are being made by Landlord’s to agree studio operators or gym operators. Classes A1 and A3 remain restricted and applications will be required.
• Retail parks are considering self-storage, trade, industrial, experiential uses and leisure. This pattern looks likely to continue.
• Highstreet stores are showing less change. Property is owned on a more piecemeal basis and in many instances, retail space remains the most valuable use for these premises.
• Springboard have reported that at retail parks, footfall is down only 12% year on year. Highstreets and shopping centres on the other hand are reporting a 34% and 39% decline, respectively, in footfall.

Q: If the landlord closes the shopping centre, does the tenant have any recourse?

• Kirsty states that this is a difficult question. Issues are posed because some retailers are still able to trade - takeaway within the hospitality sector being a clear example. On the other hand, are retailers where the wider centre wishes to open but the retailer does not perceive click and collect as a feasible option for them financially.
• There are going to be disputes as to who should bear the cost of opening.
• A compromise seems to be the 50% rent arrangement that is being reached but there will be tenants that will push for no rent whilst the centre is closed.

Q: Will service charge and insurance rent be increased due to empty units and remaining tenants being required to bridge the gap?

• Parties will need to check the provisions of the lease and how the service charge is apportioned. Does it exclude lets that are unoccupied and are not paying service charge?
• In terms of costs, several landlords have reduced service charge due to the pandemic. Costs related to entertainment and advertising have significantly reduced. On the other hand, many are incurring additional costs in respect of cleaning and having the signage manned.
• To the extent there are any voids or gaps due to empty premises, this cost should be borne by the Landlord. In any event, landlords will be under obligations to act reasonably and in an efficient manner.
• Parties will need to be diligent with service charge statements to check that service charge is being appropriately charged. If charges have increased, this must be justified.

Click & Collect vs COVID clauses

• Unfortunately, an area that poses more questions than there are answers at the moment. There is going to be huge debate as to:
  • when a store is considered to be ‘open’;
  • whether tenant’s ought to have opened;
  • whether providing click and collect precludes reliance on pandemic drafting; and
  • whether service charge is chargeable if the store is closed but the shopping centre or retail park is open.
• The government perceived that the permitting click and collect during lockdown 2.0 would help retailers. The issue however is the stark differences across the retail sector. For some retailers, click and collect is profitable whereas for others, home delivery and utilising the furlough scheme is more cost effective.
• Pandemic drafting, to the extent it can be achieved, tends to be quite black and white – it tends to say that you have to close due to a mandatory measure, and does not address opening only part of the business for trade.
• Beth states that from a tenant’s perspective, we try to carve out click and collect from being included in turnover rent provisions. Tenants will need to be very careful in the nature of sales that are accepted so as not to inadvertently trigger turnover rent charges.
• Both parties must be sensible and come to a mutually acceptable position.
• Robin reports that there is the same lack of answers in Scotland. Scottish regulations distinguished between shopping centres and retail parks; the latter being permitted to open but the former having to remain closed. Demonstrates that when coming out of lockdown, it may not be the case that either everything is shut, or everything is open.
• Dan states that given the lack of clarity, agreeing something which feels fair is going to be paramount. Beth agrees that there must be an element of the parties being in this together, given that these relationships are symbiotic.

Pandemic Clauses – Hints and Tips

• Speak to your landlord and be collaborative.
• The challenge for occupier clients is that solutions are largely being found on a confidential basis, whether by way of lease or side letter. It is difficult to perceive what market practice is.
• Across Shoosmiths, there is a mixture of suspension and deferrals being seen and the 50/50 compromise is a popular end to the story given that this is a situation of no-fault on behalf of the parties.
• Landlords are frequently asking that tenants claim on insurance wherever possible. Tenant’s must be careful when agreeing this in principle, as insurance cover may only cover a few days of rent suspension rather than an extended period.
• Beth reports success on trying to separate the financial aspects of the lease (service charge and principal rent) from the operational provisions. Operational provisions are much easier to agree amongst parties. Those that go to value are proving to be more difficult. Dividing the issues when approaching landlords may help the tenant’s position.
• Dan states that the second lockdown is inciting greater flexibility with landlords recognising the need for covid clauses.

Q: new occupier demand - are we going to see a new way of living, shopping and enjoying life post-covid?

• Dan states that a new pattern is emerging in respect of shopping behaviour. Retailers are still acquiring units throughout the pandemic.
• There seems to be a trend in retailers taking up premises in retail park environments, particularly those that do not have a large online presence or platform.
• There is still activity and for many, out of crisis comes opportunity.

If you have any further questions, please do not hesitate to get in touch with members of the panel.

Listen to a recording of the webinar below: