The Coronavirus Landlord-Tenant Playbook, Revealed
The coronavirus is already taking a heavy toll on many real estate sectors. Millions of jobs and the future of thousands of businesses hinge on the outcome of negotiations between landlords and tenants in the wake of the March quarter day.
For retail, leisure and serviced office tenants, the last few weeks of the coronavirus lockdown are just the beginning of what could be many months of problems paying the rent.
And it’s no walk in the park for landlords and lenders, either. Cashflows are imperilled, creating a risk of mortgage defaults.
Speaking last week at a Bisnow and Lorenz Consultancy webinar, Surviving & Striving: Rent Payment Negotiations In A Time Of Distress, experts offered a four-point plan for how tenants and landlords could find common ground and make sure everyone comes out of the other side of the crisis as unscathed as possible.
Lorenz Consultancy Head of Lease Advisory & Professional Richard Russell and Buchler Phillips Chairman David Buchler came together to examine the options.
1. Share The Pain
Landlord and tenant (and landlord’s lenders) are all in this together, which means everybody should expect to share the pain.
“Landlords need to remember that tenant revenue in the leisure, hospitality or retail sectors is way down or nonexistent. Many closed a week or two before the lockdown and have no revenue but substantial outgoings,” Russell said.
“It’s good that the government has prevented landlords from taking action for nonpayment of the March quarter day rent, but what happens on the June quarter day, because it is very unlikely any of these tenants will be able to pay double rent in June?" he added. "There has to be compromise on all sides and the landlord has the take some of the pain. Just waiting and seeing what happens in June is no good, because tenants need to plan ahead, and if they are faced with double rent in June they may just hit the wall.”
Bear in mind that when lockdown ends, life may look rather different. Russell warned on guidance from Italy about spacing in hospitality venues, which could severely reduce capacity and thus tenants’ potential revenues.
2. Try Informal Solutions
An informal solution is best, not least because with the courts barely functioning, action to enforce liabilities is unlikely to get anywhere fast.
“Some landlords, like Grosvenor, have taken the initiative and offered three months rent-free," Buchler said. "Tenants can appeal against rates bills, and see what happens — but the most important thing for any tenant is to hang on to whatever cash they’ve got, hoping they can survive for a few months and come out the other end of this."
Government initiatives on evictions and furloughing staff might help, although as yet their impact is unclear, Russell said. Under the proposals, landlords cannot evict tenants for failing to pay rent between now and June.
In circumstances like these nothing is out-of-bounds for discussion. For instance, some tenants are no longer paying service charges or insurance. Should they? The answer was maybe, maybe not, depending on circumstances, Russell said.
3. It’s A Three-Sided Discussion
Lenders as well as landlords and tenants must be involved in talks.
“It is incumbent on lenders to be as generous as they can to landlords, and help them out of trouble, and if they do then landlords can help the tenants, because the landlord wants the tenant to survive and pay its rent and be profitable. So this is very much a tripartite balance. A lot of the discussions we’ll see will be between all parties,” Buchler said.
A snap survey of webinar participants showed that most lenders had offered no forbearance and wanted their loan payments as usual.
“If that attitude doesn’t change there will be problems, and it won’t do the market any good. The house of cards will fall down,” Russell said.
4. Be Transparent
The key will be transparency, Russell said. “If the tenant is not profitable, and they show their bank statements, and they would go to the wall without help, then that helps the landlord make a decision," he said. "If the tenant is sitting on hundreds of thousands in the bank, then it’s a different position."
The ideal solution leaves all parties moderately dissatisfied. But sometimes that happy outcome is unobtainable in which case a formal, legal solution may have to be imposed.
“To preserve a business we’ll try a formal arrangement that imposes a deal. The shape of that could be incredibly varied, and it could also be quick, perhaps two or three weeks,” Buchler said.
“The government is looking at new frameworks on restructuring tools and are talking about a moratorium on creditors being able to wind companies up, to allow breathing space for a business, and some protection for suppliers so that businesses can carry on trading, because we have to preserve business and keep them going.”
You can find a recording of the webinar here.