The coronavirus pandemic is accelerating and undermining many businesses’ key trading assumptions. No business is immune, with the real estate sector feeling the affect directly and through their tenants’ financial positions.
From a practical point of view, businesses should monitor their key indicators. With their own businesses and those of their tenants severely disrupted, the monitoring of cash is key.
It is likely that some tenants, some of whom have had their businesses closed, may not pay their rent in time, with banks still requiring interest to be settled. Those in the construction sector may find that their sites will be closed for several weeks, impacting cash flows and putting strain on their business. It is therefore essential that the position is monitored and stakeholders are engaged with.
Considering the volatility of the market and the wider economic uncertainty, accurately valuing assets and portfolios is proving challenging with valuers inserting ‘material uncertainty’ clauses in their valuation reports, to give themselves leeway. The longer-term issue with commercial property landlords is that they cannot assess asset performance and make clear investment decisions, meaning that we are expecting investment levels requiring loan finance to be very low in the short-term. Any change in property values because of the coronavirus crisis may severely affect loan to value (LTV) banking covenants.
Commercial landlords need to ensure that they are paying interest to their lenders. In the event of a cash shortfall because of unpaid rent and a possible interest cover loan covenant breach, landlords could be subject to significant penalties, to add to the rent shortfall they will be experiencing.
Read our five areas to focus on when negotiating with your real estate lender here.
Here’s a summary of the resources and Government support specifically available to the real estate sector in addition to the general provisions available to all entities.
Eviction bans: residential property
An eviction ban for residential tenants expired on 20 September, after six months of Government protection for those in private rented accommodation. Eviction cases involving violence or anti-social behaviour will be heard first and there is expected to be a backlog of related cases. However, landlords must now give six months’ notice of eviction, rather than the two months which was in place prior to the pandemic. This extension is expected to help mitigate the volume of evictions over the next year.
Eviction bans: commercial property
Commercial tenants are similarly being protected from eviction, which has been extended until the end of 2020. This gives tenants extra security and time to secure the future of their business but puts an extra strain on landlords. In some cases, it is possible that landlords will have up to a 12 month period of no rent, particularly if their tenant is in a particularly hard hit sector.
It is important to note that this is not a rental holiday, as all commercial tenants will remain liable to pay the full amount in due course.
Further guidance can be found here.
Code of practice for the commercial property sector
Government has published a code of practice to help commercial landlords and tenants map out plans for economic recovery during the coronavirus pandemic.
Developed in close collaboration between government and leaders from the sector, the code is designed to provide clarity for businesses when discussing rental payments and to encourage best practice so that every part of the chain is supported.
The code is voluntary in nature and is relevant for all commercial leases held by businesses in any sector which have been impacted by the coronavirus pandemic.
The code can be found here.
Business rates holiday
A business rates holiday has been announced for the 2020/21 tax year for retail, hospitality and leisure businesses in England. Properties that will benefit from the relief will be occupied hereditaments that are wholly or mainly being used:
- as shops, restaurants, cafes, drinking establishments, cinemas and live music venues;
- for assembly and leisure; or
- as hotels, guest and boarding premises and self-catering accommodation.
It should be noted that there is no empty property relief available to landlords when these types of properties have been vacated.
Further guidance can be found here.
If landlords are getting requests from commercial tenants to delay rental payments or request rent free periods, there could be significant VAT issues. There could be further VAT implications if, for example:
- you agree to a rent holiday in exchange for a change to the contract or an extension of the lease – this could be seen as a barter transaction and create a VAT liability.
- the tenant is partly exempt and connected to the landlord, there could be further implications/complications.
A full list of practical steps to take following Government measures to helps businesses can be found here.
For more information please contact Howard Freedman.