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Sector-wide rent solution proposed

A sector lawyer has proposed a “long term solution to the rent conundrum”, calling for industry-wide endorsement.

The comments followed Kate Nicholls, CEO, UKHospitality, statement that the industry was the “canary in the coal mine” for the British economy, warning that the sector faced a crisis ahead of the next rent payments.

David Roberts, corporate partner, head of leisure, CMS, said: “Turnover rent was originally designed to represent a fair sharing of risk and reward between landlord and tenant. Over time, the fairness of upwards only base rents and 10% turnover top ups started to really put stress on the margins.

“I suggest there be an industry approved turnover rent deal, endorsed by landlords and tenant bodies and UKHospitality that promotes a standard clause which can be easily and cost effectively implemented that presents a fair position for the current situation.

“Rent free until two months after reopening and then a fixed rate turnover rent (say 5% or the relevant % of turnover to rent for 2019) until the business at the premises delivers two quarters of like for like sales figures that are equal to the 2019 quarter sales figures; at which time the ‘patient’ is back in financial health and the normal rent resumes.

Roberts told us: “What we don’t want to happen is 3 million conversations between lawyers, landlords and tenants to try and get a fair outcome. If you had a strong tenant in before then you have to adjust the risk/reward slowly and if there’s an easy way to adapt it, that would make a world of sense. No landlords wants to end up owing loads of empty properties.”

Nicholls was addressing the House of Commons Treasury Committee, commenting that hospitality businesses had been frustrated by the loan scheme, with a survey of its members showed that 50% of businesses had applied for a loan but only 18% of those that had applied had secured one, with 58% of applicants still waiting for a response. She added that some banks had indicated they would not lend to hospitality businesses.

She added that, despite an extension to the Coronavirus Job Retention Scheme, an estimated 350,000-500,000 hospitality workers were missing out as they were seasonal workers or hit by technicalities, including new starters and those unable to produce a payslip.

Nicholls said: “Government support for businesses has been swift and it has helped many businesses get over the initial shock of the crisis. It is clear, however, that too many businesses are struggling to access support and that the schemes in place must be extended and enhanced.

“Hospitality was the first sector to be hit hard by the crisis and it will be one of the last to make a recovery. Even when lockdown measures are lifted, our sector faces a huge challenge in getting customers back through their doors and finding solutions to social distancing measures that are likely to be in place.

“Business support needs to be boosted immediately to make sure that every business that needs it can access it. Scrapping thresholds for grants and support with rents will keep businesses alive and keep jobs open.

“This support then needs to be carried over after the worst of the crisis has passed. If it is abruptly switched off, then all the good work that has been done during these difficult weeks will be undone. Hospitality is going to be battling with the effects of this for months, if not years and support from the government cannot be stopped until businesses are back up to full strength.”

Turning to the grant scheme, Nicholls said that 71% of hospitality business was carried out in venues with a rateable value of above £51,000 and therefore ineligible for a grant, with 71% of UKH members having claims rejected. She said that “serious damage to the sector” was expected when rents were next due without extended moratorium, but that the sector had confidence it could return to near full strength if it supported on rents.

Jane Pendlebury, HOSPA CEO, told us: "I totally agree that hospitality will need much additional support in order to survive. Many businesses are already on the brink of collapse despite the current help.

"With cashflow already hard hit with little or no income, outgoings are still significant - and the additional need to re-fund pre-payments on cancelled hotel bedrooms is devastating what little cash reserves there are. Guests are not happy with credit notes or vouchers much of the time. Cancellation refunds will be the final nail in the coffin for some, especially with insurances not kicking in.
 
"If hospitality businesses can keep afloat in the short term - I can see hotels being able to re-open more quickly than pubs, bars and restaurants. Smaller pubs and restaurants will be hit especially hard. And if social distancing measures are to be continued that could mean further investment (screens / barriers for point of sale etc) for already beleaguered businesses. Plus reduced tables / number of punters will see revenues decrease too. It’s not a pretty picture."

KPMG has suggested that GDP will fall by 8% this year but this drop will not be equally shared across sectors. The accountant said says that hotels and restaurants, pubs & cafes would see a drop in output of 30% and 29% respectively whilst utilities will lose only 12% and transport and logistics will be down by 3% (with a surge in deliveries offsetting a drop in demand for travel), IT by 2% and healthcare and the public sector will grow by 5%.

KPMG said: “The hospitality industry will also find it harder to recover lost output next year; cancelled travel plans and restaurant bookings will mostly be gone for good, unlike manufacturing and construction, where there should be a stronger rebound already this year thanks to back orders that can be filled once the lockdown is over, even if the initial fall in output during the lockdown will also be very large.”

The company forecast that ‘recreational & cultural service’ income would down by around 70% in Q2 with a bounce to a running rate of around minus 5% by Q1 next year. KPMG reported that, in pubs and restaurants: “We expect the recovery to be more gradual than the recovery of the overall economy, as the threat of reinfection may keep people away beyond the lockdown period until a vaccine becomes available.”

KPMG said: “The current slowdown is unprecedented on a number of levels. One of them is the scale of contraction in output that is expected, due to the lockdown and continued social distancing measures anticipated until a vaccine is found, which will also cause fluctuations in output to be sharper than in previous recessions.”

 

Insight: The past few weeks have underlined that the sector requires sector-wide solutions to its sector-wide problems and that these are not going to come from governments for which hospitality is not high on the agenda.

We have seen movement this week on this front from Accor, presenting opening-up options to the French government which could then be adopted across Europe. Outside cleanliness and how to reopen, the most pressing issue is cash and who is paying whom for what. A simple solution which everyone could sign up to is clearly much to be wished and sooner rather than later as the next rent payment date approaches.

It is heart-warming to see a lawyer come up with a solution which cuts legal wrangling. Although we’ll check his wellbeing again after the office Christmas party.