Banner triangles

Hospitality and Leisure – Landlords, Tenants and the Coronavirus story so far

This article reviews the effects, reliefs and reactions of organisations in the hospitality and leisure sector which operate from leasehold premises caused by the Coronavirus outbreak up to the May bank holiday.

The hospitality and leisure sector has arguably been one of the worst-hit sectors by the current outbreak and associated mitigation measures. We take a look at how the industry has reacted and what happens next.

The government’s initial recommendation not to visit pubs, bars and restaurants created a gruelling limbo where venues were open, staff were employed and operating costs continued with few, if any, customers present to put cash in the tills. At the time, the lack of a mandatory order to close also meant that businesses could not claim against business interruption insurance policies as the trigger for a claim in the form of a government direction had not arisen.

Businesses were left frantically searching for ways to minimise outgoing cash. The impending quarter date of 25 March created an additional headache as the vast majority of commercial leases require payment of the full quarter’s rent in advance.

The reaction of tenants to such circumstances varied dramatically: some already had rent payments in banking systems and paid on time; others sought alternative arrangements with their landlords, such as monthly rent payments or delaying payment of the March quarter’s rent to June or September; and others simply decided to withhold the quarter’s rent entirely and face the consequences.

Landlords’ reactions were similarly diverse: some landlords, including Hammerson and British Land, reacted sympathetically, either by electing to defer the quarter’s rent to give their tenants welcome breathing space or by switching tenants to monthly rents (on the basis that some cash is better than none), presumably fearing potentially empty premises in the event of a tenant’s insolvency and ultimate lease disclaimer.

Other landlords decided to take a firmer line and, if payments were missed, attempted to take enforcement action along the lines of the measures mentioned below.

In such uncertain times, it is pleasing to see that, in some cases, landlord and tenant relationships have been strengthened by the approaches taken. Rob Pitcher, CEO of Revolution Bars Group, said that, “Some of our landlords have acted as true partners to our business in this crisis, immediately providing a complete rent waiver for the three months of the March quarter and I’m very grateful to them for taking the strategic long-term view of our relationship”.

Government relief subsequently began to filter through in the form of the Job retention scheme, business rates relief (initially for smaller premises and then including retail, leisure and hospitality businesses as a whole), business interruption loans, statutory sick pay repayments, VAT deferment and small business/premises grant funding. However, many of these measures were (and some still are) business or premises-size dependent.

The government decided to act in order to prevent leases being terminated and speedily introduced a moratorium on forfeiture, initially for residential and then in relation to commercial properties. Some landlords subsequently resorted to other measures to compel tenants to pay their rent by serving statutory demands and, in a few cases, winding up petitions. Many businesses argued that such steps were in moral conflict with government commentary albeit the reasons for non-payment appear to have varied from tenant to tenant and it has been alleged that some were not entirely related to the current crisis. Nonetheless, some weeks later, the government announced further, proposed moratoria to suspend insolvency measures to give tenants further, albeit temporary, relief.

The sentiment of trading businesses, unsurprisingly, seems to match that of government commentary to the extent that there should be no winners or losers from this situation and that the status quo should be maintained as far as possible. Unfortunately, this is easier said than done and, much like corroded, leaking pipes, the tendency, when one leak is fixed, is for the pressure to build and another leak spring up further down the line. In this instance, customers have been prevented from spending which means businesses that occupy their premises as tenants do not have the cash to pay the rent, landlords have been prevented from enforcing non-payment of rent but, in turn, when rent payments are not received, landlords do not have the cash to service their loans which leaves them at risk of breach of financial covenants with their banks. If the banks choose not to extend facilities and cannot enforce, they will look back to the government that introduced the measures which stopped the public from going out and spending in the first place. Ultimately, to continue the metaphor, the aim must be to stop everyone from getting wet for as long as possible until the corrosion is removed or a new route for the flow of water can be found.

For the hospitality and leisure sector, the take-up of Government measures has been understandably high. According to the ONS, for the period between 23 March and 5 April, of those businesses within the sector that had temporarily closed their doors (81% in accommodation and foodservices), some 78% of staff had been furloughed under the job retention scheme.

The hotel sector is clearly feeling the effects of the current restrictions on travel and social distancing with UK hotel occupancy levels dropping to an average of 20% across the board. The industry measures success by REVPAR (revenue per available room), and so no or low occupancy of rooms over the months of June to September will have a huge economic impact. A few of the larger, financially secure operators may use the enforced downtime to undertake large-scale, disruptive renovation work, but these businesses are in the minority.

Of course, not all operators have closed their doors entirely. Many restaurants have taken advantage of the newly permitted diversification of use which allows restaurants to convert to takeaway or delivery services and of those which have remained open, furloughing was limited to around 14% of staff for the same period mentioned above. Some hoteliers without large cash reserves have started to offer reduced rate rooms for key workers or have entered into short term arrangements with local councils to house those in need and indeed some have stopped paying rent. Pubs have also looked to diversify with many making the most of their relationships with local suppliers to offer farm-shop-style offerings to give surrounding communities another option from which to buy their groceries other than the large supermarkets. Businesses have simply had to take matters into their own hands and created innovative schemes to help: Shoosmiths’ Manchester office was involved in co-founding the pay it forward initiative which allows customers to buy vouchers from local restaurants to improve their cashflow now with a view to redeeming the vouchers when the venues re-open in due course.

Turning to the present, the question of how and when the sector might get back to some sort of normality is one of the primary concerns. We are seeing in other sectors that there is a re-assessment of risk and the ability to operate after initial, rushed guidance created confusion. Building sites, for example, are starting to re-open with social distancing measures and processes in place. Legal transactions such as sales, purchases and leases across all sectors are also starting to move again after being paused because people are beginning to look again at whether they can, for example, arrange for a surveyor to conduct a valuation/asbestos/EPC survey that might otherwise have prevented a transaction from proceeding. People are also solving practical issues such as introducing measures to allow documents to be signed by directors who are scattered across the country in their personal residences, sometimes with limited printing and scanning facilities.

Operators of food outlets such as Wagamama, Greggs and Five Guys have also started to re-open some of their venues either to provide charitable contributions to NHS and other key workers or to test limited operations and new social-distancing-compliant processes involving delivery or click-and-collect. Richard Cheshire, CEO of Krispy Kreme UK and Ireland, said: “In the past few weeks, we have been busy planning how we can adopt a phased approach to carefully and responsibly continuing to serve our customers in the UK. From Tuesday 12 May, in addition to providing delivery, we are now opening nine of our drive thrus for customers and a further seven shops for customers either as pre ordered click and collect or walk in to take away.

Of course, the leisure and hospitality sector may face a more difficult and prolonged return than most as it is comprised of businesses which are built around social interaction. When social distancing is imposed and social interaction itself is being restricted, how will it be possible to balance a safe and cautious return while still getting the numbers of people into venues that are necessary to make them profitable? There will be a cost to implementing social distancing and a resulting decrease in revenue. Will being served by a waiter or waitress wearing a mask and gloves be an enjoyable dining experience or will the thought of being one of only ten people allowed on a dance floor at any one time make you rush out to dance at a club?

For hoteliers, there is hope in the sector that once restrictions are lifted, the industry will bounce back but it will all hinge on how quickly international airline routes re-open. We anticipate that the many businesses (including our own) will be looking to minimise any business travel for the foreseeable future which will also impact on occupancy rates. 

Once restrictions are relaxed, there will inevitably be a minority who flout the rules and take advantage of lesser restrictions which may lead to a second peak in coronavirus cases and therefore a second lock-down; a situation that is almost universally thought would be catastrophic for the country’s medical and economic health.

Naturally, each country’s approach to the virus to date will play a part in deciding how to reignite each sector and type of business. For example, Germany has taken a very strict approach to try to trace and control the spread of the virus which has limited early numbers of deaths due to greater containment. The UK’s approach has arguably been a little more relaxed in terms of absolute prevention of the spread of the virus and has been more focussed upon ensuring the numbers of people infected do not overload the NHS to a point at which it is unable to cope. While this has arguably led to a higher number of confirmed cases, it does mean that a higher percentage of the population will have been exposed to the virus and are therefore more likely to have a reasonable level of immunity. This may play into the hands of the hospitality and leisure sector in the UK as it is likely to reduce the risk of the second peak mentioned above and allow much-needed, closer social interaction to be reintroduced sooner.

One thing that is for certain is that we do not yet have all the answers and those organisations that come out of this stronger will be those who have worked collaboratively with their advisors, landlords, tenants, suppliers, employees and communities to share knowledge, adapt and find innovative solutions to weather the storm and indeed, to benefit and improve how they conduct their businesses going forwards. The Prime Minister’s announcement over the weekend hinting at possible reopening of hospitality venues in the summer together with the June quarter day and end of temporary moratoria will no doubt focus the minds but before we get there it seems to be an ideal time to reflect upon what we have learnt to date and to plan and find longer-term solutions for a move to the new normal, whatever that may be.

Disclaimer

This information is for educational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.

Insights

Read the latest articles and commentary from Shoosmiths or you can explore our full insights library.