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What is the impact to a retail landlord of stores closing?
There are two impacts to reflect upon – the period leading up to a store closure and the closure itself.
It’s likely that if a retailer is in difficulty, conversations will have taken place about rent reduction either proactively or as part of a CVA (company voluntary agreement). It’s possible there could already be rental-debt accumulated, which would be considered as debt in the event of the company entering administration.
If it is agreed that a store, or stores, will close, discussions will be needed about how this will be transition back to the landlord and in what state, using the original tenancy as a guide.
What mechanisms can a landlord deploy if a retail tenant appears in distress?
Landlords in England and Wales retain scope to recover rent and other sums due to them under commercial lease agreements. Depending on the specific circumstances landlords find themselves in, options could include recovering sums owed by tenants of commercial property from former tenants, guarantors, recovering them directly from subtenants, or through debt recovery proceedings.
However, the health crisis of 2020 has led to the publication of a Code of Practice for commercial landlords and tenants, designed to encourage both parties to act ‘reasonably and responsibly’. Legislation has also been passed restricting the ability of the landlord to flex existing legislation to recover debt, such as Commercial Rent Arrears Recovery (CRAR), Statutory demands and winding-up orders.
Does forfeiture come into play?
The ability to forfeit enables a landlord to re-enter their property following a breach by the tenant, and by doing so, terminate the lease. Depending upon the reason for forfeiture, termination can take place with immediate effect, or following a period of notice.
In order to be able to forfeit a lease, a landlord will firstly need to establish the basis of their right to do so. The most common way to do this is to rely on a specific clause in the lease which grants to the landlord the right to forfeit in certain circumstances.
It is also worth noting that, in certain situations, a landlord can exercise a right to forfeit in the absence of a specific clause in the lease. If the tenant has breached a condition of the lease (i.e. a fundamental provision going to the root of the contract) then the right arises automatically. However, the right should be exercised with caution, following legal advice, to establish whether the tenant’s breach does indeed go to the root of the contract. The danger of attempting to forfeit a lease in the absence of an explicit right to do so is that the landlord could be in breach.
It should be noted that the Coronavirus Act 2020 imposed a suspension on the forfeiture of most business tenancies from 26 March 2020 until 31 March 2021, meaning a landlord cannot exercise a right to forfeit a lease on the basis of a tenant’s non-payment of rent during this period.
What state should a landlord expect to get their property back in?
Amidst ever-changing buyer behaviours, footfall in physical stores declining and the shift to online retailing continuing to gain momentum, being a high-street retailer is getting tougher by the day. Add in a global health crisis requiring repeated, forced closures of non-essential retailers for large periods of time and it’s easy to see why so many retailers are struggling.
As the consumer pound gets spent elsewhere, funds are running dry for many with debt accumulating and no reasonable option for stemming this. It’s a daunting time to be a retailer but there are levers to pull to try and achieve the turnaround needed.
For retail landlords, it’s the very survival tactics retailers are leveraging that is their undoing. As conversations continue about rent reductions and waivers, retail landlords are having their own income source cut off with little or no recompense. In the wake of Covid-19, the landscape has changed and while its intent is temporary support, the effects could be far longer-lasting.
Landlords of commercial properties are left facing a predicament – they are unable to take action with tenants who are not paying and therefore any enforcement will be difficult. The Government’s Code of Practice encourages businesses to keep paying their landlords what they can, but the reality is that the code is voluntary and without any immediate threat of action now available, most tenants will probably look to pay the minimum possible whilst their businesses look to reopen, leaving landlords with their own bills to pay but minimal income in the short term.
Just like any other business, landlords can seek to obtain the support from the UK Government, such as applying for the newly-announced business loans and taking advantage of the various support schemes. However, the fact remains that many will be reliant on having a good relationship with their tenant and hoping that they can agree some reduced payments for the time being.
Where store closure or repurposing is being explored, there are numerous opportunities available to maximise the realisable assets in a physical store and to transform the interior ready for its next purpose – whether that be as a shop or as an office, community building or even conversion to residential.
Managing store closures. What you need to know
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