LONDON — For years, landlords have had the upper hand in London’s
real estate market, pushing up rents as businesses clamored for prime locations
near offices, tourism hot spots and transport hubs and as the city’s population
grew and grew. Restaurants were often locked into leases with clauses that
allowed the rent to only go up. Retailers faced increasingly exorbitant rents.
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Over the course of a year, the pandemic has brought a halt to
this arrangement, shifting the power balance between commercial property
tenants and landlords.
Confronting the alternative of having empty properties, some
landlords have loosened their terms, with offers of rent holidays or other
concessions. But in other cases, changes have been forced on property owners by
struggling tenants who, in increasing numbers, have turned to an option in
Britain’s insolvency law known as a company voluntary arrangement. The result
has been slashed rents or a switch to leases that fluctuate based on the tenant’s
earnings.
Seeing their prospects dwindle, some property owners are saying
the leasing system is outdated and are calling for more transparency and
cooperation with their tenants. And a coming legislative review by the British
government could bring more change.
The relationship between tenants and landlords “has definitely
become more fraught because of the pandemic,” said David Abramson, the founder
and chief executive of Cedar Dean, which specializes in helping businesses
restructure leases. “Landlords are not used to being in business with one hand
behind their back. Generally, they’ve been the more dominating force, and it
has been quite aggressive.”
Landlords had to have “a complete change of attitude,” Abramson
said. “A lot of them are still getting their heads around it.”
The changes are playing out slowly, especially for small
businesses. Dhruv Mittal, a 29-year-old chef, came to a heart-wrenching
decision last summer: He closed his restaurant in central London’s Soho
neighborhood after lockdowns had made it impossible to continue.
He had opened the restaurant, DUM Biryani House, four years
earlier in a basement space with pop art-inspired posters on the walls, pumping
out hip-hop music and serving biryanis in the traditional style of Hyderabad in
south-central India, where his father is from.
Despite government measures to help business survive the
pandemic, the quarterly rent due on Mittal’s restaurant, about 20,000 pounds
($28,000), proved to be an insurmountable burden without revenue coming in. He
tried to switch to a smaller site, but his landlord company didn’t have
anything, and negotiations to reduce his rent weren’t successful.
“Our landlords were quite strong on the fact they would prefer
an empty site where then they could charge whatever rent they want to a
newcomer than to provide a discount to the current tenant,” Mittal said.
In August, the landlord came up with an offer: Mittal could
defer paying one-quarter of rent — the amount he owed — until 2021. But by
then, he had laid off his staff and couldn’t reopen because central London was
still deserted. In October, he liquidated his company, still owing tens of
thousands of pounds in rent and money to other creditors.
The property still doesn’t have a new tenant; the DUM Biryani
House sign hangs above the locked doors. The landlord declined to comment.
Mittal would not have been evicted immediately for not paying
his rent. Last year, the government put in place a moratorium on evicting
business tenants, which has been extended until the end of March. Many
businesses have taken advantage of this arrangement, but most unpaid rent will
just accumulate as debt that can be demanded as soon as the ban is lifted.
A more contagious strain of the coronavirus and a winter surge
in cases have shuttered Britain’s restaurants and shops again. By the time many
of these businesses will be allowed to reopen, their doors will have been shut
for at least half of the past year. A recent survey found that only about half
of retail rents had been collected for the last three months of 2020.
Many tenants urgently need more help. Cedar Dean surveyed 400 leading
hospitality companies last month, and three-quarters said they were considering
restructuring or insolvency and would need help from either the government or
their landlord. Some businesses won’t get enough help and will be forced to
close.
Pret a Manger, the coffee and sandwiches chain with nearly 400
stores in Britain, turned to its landlords for concessions after lockdowns
crushed its income. It now has 65 percent of its locations on turnover leases,
at least temporarily, compared with about a quarter before the pandemic.
Turnover rent arrangements, sometimes known as percentage rents in the United
States, vary but can include a company’s paying a base rent lower than market
rates and topping that with a percentage of gross income.
“We’ve got about 75 to 80 percent of our landlords so far in the
UK into a good supportive position,” Pano Christou, Pret’s chief executive,
said.
In Britain, the government has traditionally been reluctant to
get involved in these commercial contracts, relying on a 1954 law governing the
relationship between commercial tenants and landlords.
“When commercial occupiers take a property, it’s a
business-to-business contract,” said Catherine Hughes, an associate professor
and head of real estate and planning at Henley Business School. “And that has
influenced the way they’ve been seen and the way they’ve been regulated — or
not regulated.”
But that may be about to change. As government ministers have
found themselves intervening deeper in the economy, the department that deals
with communities and local government said in December that amid a “profound
adjustment” in commercial property, it would review “outdated” legislation.
It’s unclear how broad the coming changes may be. But Abramson has
suggestions: He said long leases that mandate rents must rise at regular review
periods — so-called upward-only rent reviews — should be abolished. Clauses
that allow tenants to leave if the rent in their area becomes too unaffordable
should be introduced, he said.
But, he added, companies also shouldn’t be able to use a company
voluntary arrangement to change their lease terms.
For big companies paying rent at numerous properties, insolvency
agreements have become an increasingly common way to shut down sites and cut
rent. Unlike entering administration (Britain’s near-equivalent of Chapter 11
bankruptcy), a company voluntary arrangement allows a business’s directors to
stay in charge as they restructure the company’s debts. It can be a useful tool
for a company that has a path back to profitability.
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