In order to come out on the other side, there needs to be a collaborative approach adopted to tackling the global crisis today. Commercial landlords and tenants may find this to be the case.
Primark refused to pay its rent of £33 million for the next three months. Primark will especially suffer in a time like this. The company does not have an online business and with the ordered government closure of non-essential stores, Primark is expected to lose around £650 million in net sales for every month that its stores remain closed. Primark is one of many tenants refusing to pay rent due to government-ordered store closures; e.g. Burger King closed 500 stores on Tuesday and announced that it would not be paying rent.
What does this mean?
The relationship between commercial landlords and tenants has proven to be a strenuous one due to the coronavirus pandemic. Government-ordered store closures mean that non-essential stores have shut down. As big shopping malls and stores remain empty, companies affected will find that profits and revenue will continue to decline, and so will default on rent payments. This has the ripple effect of landlords, as their profits and revenue are also being impacted negatively, as they too struggle to meet their own financial obligations. For example, Intu Properties is seeking to re-negotiate some of its £4.5 billion debt with lenders.
Typically, commercial landlords would in most cases have greater bargaining power. A failure to pay rent gives the landlord the right of forfeiture (right to evict) and a right to bring a claim against the tenant defaulting. However, bringing claims at this time would incur further costs for landlords. Additionally, there would normally be high demand from other tenants queued up for rent spaces to conduct business, but that is not the case at the moment. The British government also stated that landlords should not evict tenants who do not pay their rents due to the coronavirus pandemic.
As a result, the current business climate demands that landlords come to the negotiation table willing to consider and implement creative solutions that could ensure that all parties stay afloat during the current uphill battle. Blackstone Group and Intu Properties are setting examples of this. Blackstone is offering tenants a chance to defer payments for 3 months, and the company has created a £10 million support fund for any tenants that need it. While Intu is cutting its service charge fees this year, after only receiving 29% of its rents due.
Impact of Law firms
Property lawyers will be of great importance as landlords and tenants look to unite and emerge from this pandemic crisis solvent.
Finance lawyers may be required to help restructure debt agreements with banks; as landlords may not be able to meet financial obligations, from the ripple effect of store closures and tenants defaulting on payments.
What to look out for
As an update from last week, WeWork got stood up this week!
WeWork is a real estate company that provides shared workspaces for tech start-ups and other services for enterprises. It operates through taking out long term leases and renting out its spaces short term.
The SoftBank Group rescinded the £2.4 billion offer to acquire WeWork and rescue the company from its decline in valuation.
WeWork has threatened legal action against SoftBank.