The ongoing Covid-19 crisis has caused considerable hardship for businesses across the UK and abroad. The retail, hospitality and leisure sectors have been particularly hard hit in the UK, with businesses facing lockdown-enforced closures followed by a summer of uncertainty, diminished consumer confidence and increased reliance on online shopping. Many retailers in England relying on a physical consumer facing premises will have breathed a sigh of relief following the Government’s recent announcement that most “non-essential” shops and businesses (including gyms) can re-open from 2 December in all three Tiers, though the hospitality sector continues to suffer from stringent limitations in Tiers 2 and 3 during what would ordinarily be one of the most profitable periods of the year.
Since the financial repercussions of the pandemic started to materialise, tenants in the retail, hospitality and leisure sectors have been seeking rent concessions and abatements in their existing leases, and pushing for more flexible lease terms when signing up to new leases. Inclusion of so-called “Covid-clauses” in agreements for lease and sale contracts has become increasingly common (though the terms of such clauses vary considerably). Another trend, particularly seen in retail leases, has been for turnover-based rents.
There is no doubt that the financial pressures faced by many retail, hospitality and leisure tenants has swung the balance of power in lease negotiations away from landlords. Assuming the economic situation in the UK follows a trajectory similar to that outlined by Rishi Sunak over recent days and Government support gets scaled back, insolvency practitioners are going to become even busier. Some businesses will fail; our high streets and retail parks will continue to evolve. If landlords have to choose between vacant units and the income uncertainties that come from turnover-based rent leases, which option will they choose? Arguably some income is better than no income, but landlords have to consider valuations issues, lender financial covenant complications and the increased administrative burden that comes with turnover rents (which may also be accompanied by shorter terms) and “flexible” lease terms.
Even the most pessimistic projections do anticipate the UK economy bouncing back and it will be interesting to follow the trends in “standard” retail lease terms over the next few years. Will turnover rent provisions and shorter lease terms become the norm? Once the economy recovers, the balance of power may swing back towards landlords. Where the power balance ends up in the medium term is anybody’s guess, but if economic recovery takes place swiftly enough then perhaps there will not be sufficient time for a widespread shift away from more traditional rent structures. Perhaps economic recovery will take long enough for a gradual acceptance of more flexible lease terms amongst lenders and institutional landlords, partly driven by market conditions, further facilitated by legislative change and as required by consumer demand. Recent relaxations around planning use classes are a good example of how legislation could change the status quo and the impact of Brexit is yet to be seen. Further, the impact of 9+ months’ worth of Joe Wicks led home workouts may affect how much people want to use gyms. Perhaps people decide that “staycations” are great and continue to shun air-travel? Predicting trends in use of physical space in our city centres, high streets and retail parks over the coming years is going to be very difficult.