With Midas Construction set to appoint Administrators, Scott Bebbington, Senior Manager at PKF Francis Clark highlights how this could affect you or your clients’ business and…
Landlords often get a bad press, being portrayed as greedy proprietary creditors, all too ready to seize back their property when the tenant is in financial difficulty.
Under the 2020 Coronavirus Act, specific provisions were made to prevent landlords from enforcing their rights over their tenants and the initial announcement on suspending winding up petitions appeared to be aimed also at landlords.
There are reports of very significant numbers of tenants falling into arrears with their rent leaving landlords with little or no effective option but to sit back and await the expiry of the temporary provisions.
But what about the landlords? Not all are unreasonably aggressive and they may well have their own pressures. Financial commitments would probably have been based on the pre-covid conventional wisdom that leases would involve upward only rent reviews and would therefore be a secure income stream for many years to come.
Landlord/tenant problems will not come to an end with the easing of covid restrictions. Leaving aside the question of arrears of rent which may have accrued during the crisis there are well known structural changes which will impact on the relationship:
- Lockdown has accelerated the move away from traditional retail to online sales. This will have a clear and material effect on sustainable rent terms for high streets and shopping centres
- The crisis has also revealed that office based workers can often work very effectively from home. Many will prefer to do this and their employers might see the advantage in making very significant property cost savings by not having to provide accommodation for all staff at all times. There is likely, therefore, to be a large drop in demand for city centre and other office space which will force rents down
Even before Covid-19, the company voluntary arrangement (CVA) process was being used by a number of multi-site retail operators to force changes in landlord terms. This proved unpopular with the landlords but the reality is that there is now a great deal more such change required.
We believe that sensible landlords and tenants ought to be able to negotiate fair occupancy terms for properties. Initially at least this is likely to be based upon the tenants ability to pay, avoiding an unrealistically high fixed cost from businesses that will struggle to achieve stability even after the Coronavirus restrictions cease.
In the longer term, the economic environment may well settle down to the point where more traditional fixed rents can resume, but these are likely to be at a much lower level than pre-virus.
Where can an insolvency practitioner come in?
Where a tenant has rent which is no longer sustainable, both the tenant and the landlord need to consider alternative options, and these will include insolvency options for the tenant. We always regard formal insolvency as a last resort but the understanding by both parties of the likely outcomes of the insolvency process will be a necessary backdrop to sensible negotiations on terms for the future.