Can Pay Won’t Pay – A testing time for Landlord/Tenant relations

Just a short number of months ago a commercial investment let on a full / effectively full repairing and insuring lease was typically seen as a low management intensive way of securing a return in the current climate of low interest rates.  The yield, in most circumstances, being a by-product of risk.  A low yield typically reflective of a strong location, strong covenant and long lease.

Roll on a few months and the rule book has been rewritten, particularly within the retail sector.  With social distancing measures in place, businesses across the United Kingdom, from independent stores to global brands, were forced to close, significantly denting turnover.  This greatly hampered a tenant’s ability to meet its rental obligations with less than 50% of retail tenants paying their rent for the quarter day in March and the current results for the quarter day in June do not paint a rosy picture.

The vulnerability of certain parts of the retail sector has never been more pronounced with countless announcements of store closures, administrations, CVAs or demands for rent cuts.  Fashion retailers have been particularly hit with Jack Wills announcing store closures, All Saints, Monsoon (and potentially New Look) launching CVAs, Oasis, Warehouse, Quiz and Victoria’s Secret entering administration and H&M and Primark demanding rent cuts.  Shopping Centre owners have felt the consequences of this fallout with Intu collapsing and rent collection levels for other big players being at historic lows.  Hammerson’s June quarter rent collection at the time of writing stands at just 16%.

The relationship between landlord and tenant has, in modern times, never been more tested.  Government intervention has removed landlords’ power to force rent collection through the courts which has led to a number of well capitalised tenants taking advantage.  We now find ourselves witnessing a can pay won’t pay movement.

Whilst Covid-19 cannot be entirely blamed for the above, it has sped up the demise of many ailing businesses and has made many businesses undertake an urgent review of their operational property estate, in light of ever increasing online sales.  It is also likely to leave a lasting impression on how our industry operates going forward.  For example, are turnover rents to become the norm in the leisure sector and will monthly rent collection replace our four quarter days?  The way the property industry assesses a tenant’s covenant is also likely to radically change.  No longer will we focus on historic accounts; instead much greater scrutiny will be placed on the sustainability of a business.  Over the last few months we at Allsop have witnessed a flight to sustainable income streams with investors showing a strong appetite for Government backed incomejob centres for example), convenience retailing and high street banks.  The industrial sector is also benefiting as businesses look to adopt a dual ‘just in time’ (JIT) and ‘just in case’ (JIC) logistics model, with the latter meaning businesses stockpile goods in the UK, to prevent the stock shortages we encountered at the outset of this crisis.

As in any crisis there are winners and losers.  Those that react and adapt to the changing environment will no doubt fair better than those that stand still.   Some retail will not survive whereas the retail that does will be rebased in terms of rents and will need to reinvent itself.  We may be left with a two tier market, ‘destination and experience retail’ that people want to visit and at the other end of the scale ‘community shopping centres and convenience retail’.  The retail that falls outside these brackets is likely to see significant falls in value, to the point where repurposing becomes viable.