Covid-19 is here. It is impacting the hospitality and leisure sector with a concern that tenants will be in financial difficulties soon. Landlords need to plan ahead to protect tenant’s welfare and their own business interests. What you can do to be proactive now?
Will a tenant’s insurance cover any downturn in profits?
Some tenants will have business interruption insurance. This covers income lost after a disaster (often to cover terrorist attacks and their aftermath). The Government has now registered Covid-19 as a “notifiable” disease”. A tenant’s policy may have an extension to cover “notifiable diseases”. This is rare and some policies may only cover “notifiable diseases” which were specified at the time the insurance was taken out (pre Covid-19). Many tenants won’t carry business interruption cover and most won’t have an extension for notifiable diseases. If tenants attempt to take out cover now insurers may well refuse or ask for an increase in premium. You should encourage tenants to check their insurance policies very carefully – they need to understand their exposure.
What help is available for tenants in an immediate downturn?
Tied Model – the tied model provides a tenant with some inbuilt protection. To some extent you and your tenant share the burden of a drop in sales.
Free of tie model – a tenant is not protected where an outlet is free of tie. Ultimately the tenant may argue that the lease is frustrated. Most tenancies do not include a force majeure clause.
Government Assistance The Chancellor introduced measures in last week’s budget cutting business rates and extending SSP. These will go some way to alleviate financial pressures in the longer term. These measures will not completely insulate tenants against an immediate short term economic shock. We hope to see further measures which could include a stay on NI/VAT/PAYE obligations or more loans to assist businesses which could be repaid over time.
Planning Ahead
You will not want tenants trying to argue that their lease has been frustrated if the outbreak of Covid-19 is severe. It is unlikely to be in your interests to enforce against tenants. Any immediate drop in revenue will be countrywide and finding new tenants will not be a realistic option. By being pro-active now you can put in place measures which will protect you and your tenants. You may be forced to subsidise tenants. Consider negotiating to accept a reduced rent in the short term in return for a stepped increase in rent in the future. You will be seen to be helping to share the burden of the immediate drop in revenue. At the same time you can provide for recovery of lost rental income in the months to come.
Freeths are assisting clients with the drafting of amendments to rent and other lease provisions. Please contact Christopher Ainsworth for more information.
