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Leslau: Landlords Have Been Castrated. New Rent Code Of Conduct Has To Be Mandatory.

“Landlords have been utterly castrated. No one I know can remember a time when landlords were unable to collect rent.”

Prestbury Chairman Nick Leslau bluntly expressed the frustration felt by many landlords at the actions of some of their tenants during the coronavirus crisis on a webinar hosted by Bisnow and Willis Towers Watson

Can a government-backed code of conduct, provisionally announced last week, help landlords and tenants find common ground where there is mistrust? And to do so, does it have to be mandatory? At stake could be the faith international investors have in the UK real estate market.

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While in many cases, landlords and tenants have come to amicable and consensual solutions about how to restructure rents while the coronavirus pandemic hits revenues, a minority of bad actors on both sides have threatened to sour relations between two camps that desperately need each other but don’t always see eye to eye. 

The castration to which Leslau referred is the three-month government ban on landlords evicting tenants for nonpayment of rent, or from issuing statutory demands in court to force tenants to pay or face winding-up orders. In many cases, that has given tenants crucial reassurance that they can cut a deal with landlords to reduce rent and preserve precious cash.

But in other cases, landlords have pointed to tenants who can afford to pay rent and are using the legislation to avoid doing so. Examples that have received public criticism from the property industry include Travelodge, which is owned by a group of wealthy financial institutions; and Superdrug, again owned by wealthy backers, including sovereign wealth funds, and which has continued trading during the crisis but has told landlords it will be instituting a 75% rent cut.

To try and bridge the gap, the government confirmed Friday that it would be introducing a new code of conduct to which it wants both landlords and tenants to abide during negotiations over rent. Details of the code were not revealed but will be outlined before tenants are expected to pay their next quarterly rent bill later this month.

The government said the code would not be mandatory, a move which was supported by Revo, the body that represents shopping centre owners and occupiers. 

“We have pressed for the code to be a voluntary framework, providing both parties with the flexibility to create solutions suited to the circumstances,” Revo chief executive Vivienne King said. “If it is too rigid, there is the risk it interferes with the stability of existing contractual agreements and undermines the collaborative spirit that is emerging as many retailers and property owners try to find new ways of working together.”

But Leslau, who has been deeply entrenched in negotiations with Travelodge and been an outspoken critic of the company, said that in order to have any impact, the code of conduct must be mandatory.

“If people are willing to breach their contractual obligations, then they will breach a voluntary code of conduct, too,” he said. 

“I know the government doesn’t want it to be. But I think it has to be mandatory. If companies are allowed to do what they are doing without divulging extensive financial information as to why they need help, why should they be given protection of emergency COVID legislation?”

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Clockwise from top left: Willis Towers Watson's Mark Noble, Prestbury's Nick Leslau and Brockton Everlast's David Marks.

Leslau said many property owners are frustrated with retail and leisure businesses that are owned by private equity firms claiming they are unable to pay rent, when the owners have previously taken large dividends from the company and loaded them up with debt.  

“You can’t say, ‘we’re not paying because we don’t fancy paying,’ especially in cases where, as I said before, the balance sheet has been hollowed out and the owners taking cash out and not leaving any reserves,” he said. 

“If the code of conduct says you have to divulge all of your relevant nonconfidential financial information in order to be able to avail yourself of these protections, it doesn’t mean you have to give up the right not to forfeit property; we still can’t collect the rent. But it means landlords have the information so that when the cliff edge comes, when the restrictions end, we can issue stat demands, and the companies know we can, so it will bring people to the table to reach a consensual solution.”

Fellow speaker David Marks, Brockton Everlast founding partner, urged caution from the government against intervening too much in the relationship between landlords and tenants with acts like the code of conduct or the ban on landlords evicting tenants that don’t pay rent.

“Government are well aware that their well-intentioned move to help struggling businesses through this crisis had some unintended consequences,” he said.

He doesn’t think these temporary measure would be rescinded soon, even if more retailers are able to open later this month. 

“If they do tinker too much with long-established landlord and tenant contract law, then they risk reducing the attractiveness of the UK as an investment destination,” he added, and pointed out that the CVA system, which allows tenants to shed leases, had the same possibility.

Leslau echoed this and said this could have a detrimental impact on the areas of the UK outside of London.

“The long income market, which has accounted for about a third of UK property investment in recent years, is in danger of being underinvested,” he said. “If this abuse of the CVA process continues, then investment in this sector will shrink, and that puts in danger a lot of investment, particularly in the regions.”