It's time for the three Cs: collaboration, co-operation, and compromise

By Duncan Lillie

- Last updated on GMT

It's time for the three Cs: collaboration, co-operation, and compromise

Related tags Coronavirus Restaurant

Current rents are based on a business model that no longer exists - tenants and landlords need to communicate better with each other.

With the leisure sector in lockdown until July or beyond, and with the challenges of social distancing the re-opening to follow, operators find themselves in a dark place. Their frustration of running non-income producing businesses are shared by landlords, who themselves require income to fund their own debt, maintain share value, and pay staff and suppliers.

This is time for the three ‘Cs’ to come to the fore: collaboration; co-operation; and compromise.

Collaboration ​requires an open dialogue. Current rents are based on a business model that no longer exists and it is unlikely to in the short- to medium-term, if ever. To address the challenges ahead, tenants should be encouraged to share their financial projections and forecasting with their landlords.

This should include short- and medium-term assumptions on the lifting of the lockdown; the impact on profit margins of social distancing; and the possible short-term bounce back following re-opening. The latter is looking increasingly unlikely though, with consumers unwilling to return to restaurants and bars in particular due to the ongoing risk of catching Covid-19, as well as the dining experience being compromised due to the need for PPE. 

Other factors to be considered include predictions on Christmas trade and the position from Q1 2021 and beyond when the harsh realities of the recession hit the consumers.

Projections and forecasting should demonstrate the efforts the operator has made to cut their costs. Landlords can then test the business model until they are comfortable it is a robust assessment of the businesses’ ability to trade through these challenging times. It will also set a timeline by which the trade will return to a level that reflects the new normal. This will increase the chances of the landlords achieving their own objectives, which can be disclosed to the tenants as part of the ongoing dialogue.

Collaboration should engender co-operation​ between both landlords and tenants as they will both have a better understanding of the other’s position. Terms can then hopefully be agreed for a mutually agreeable lease structure. This will still largely depend on traditional valuation factors such as location, size and physical layout of any given property.

A lot has been said about the here and now. The government’s current position on lifting the lockdown will continue to exert pressure on cashflow, a situation that will increase exponentially from the June quarter day onwards. If rent-free periods are not possible, rental payments need to be deferred and repayable over a period of no less than nine months.

Thereafter, we are likely to see deals involving lower base rents than we are used to seeing in return for a higher percentages of turnover as a top-up. This will be aligned to an 'end game' involving a target rent reflecting the new normal which is likely to see rents and turnover percentages returning to levels seen pre-Covid-19.

There will inevitably be many variations on this theme, and we may even see examples of the US model being adopted where landlords effectively become operators themselves.  They invest in a majority stake in the business which reverts back to the tenant once the capital has been repaid to the landlord.

One thing is for sure though is none of this will happen without the last of the three Cs: compromise.

The leisure sector is in unchartered territory and many established market practices will fall away, so both landlords and tenants will have to learn to compromise in a way that creates a win-win scenario for all concerned.

Failure to compromise will lead to conflict, something we have seen enough of, and which should have no place in the new normal if we are ever to thrive again as an industry.

Duncan Lillie is partner at property agent Shelley Sandzer 

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