Retailers and landlords are stronger together as recession looms

The deadline to activate a referral to the The Covid-19 commercial rental arbitration scheme (read more below) ended on August 26.

Despite a handful of awards, commitment to the scheme appeared to have been limited, with many retailers citing the cost of compiling the necessary evidence and the uncertainty associated with a lack of relevant precedent as reasons for not triggering a referral.

Rental support related to Covid-19

The “binding arbitration” scheme was introduced in England and Wales in March under the Commercial Rental (Coronavirus) Act 2022 to protect rental debts on commercial property built during the pandemic during the forced closure of shops. Under the plan, if homeowners and retailers couldn’t agree on arrears, either party could request binding arbitration.

Legislation replaced the pandemic moratorium that had been in place since March 2020 to protect commercial tenants from eviction, which it ended on March 25, 2022 after several extensions.

It’s unclear what the scheme will look like in the long term, and there are questions about its effectiveness in tackling back rent that was owed across the property sector, which the British Property Federation estimated at £7.5bn.

What the scheme has successfully demonstrated, however, is a willingness among tenants and landlords to work together on challenges, such as pandemic-related rental debt.

Although the parameters of the arbitration scheme may have been a factor that helped drive a wave of negotiation, in many cases it was also the ambition of landlords and tenants who wanted to maintain their business relationships that brought them to the table.

Rising cost of living, shrinking consumer spending, and a likely recession present important tests for business and society. These conditions also create a potentially volatile real estate market, with owners having to manage rising costs, tenants facing falling sales, and both parties still having to meet contractual obligations.

If landlords and tenants use the end of arbitration as an opportunity to continue this collaborative work and review their relationships, they can find solutions together that not only help ease short-term pressures, but help build the resilience that will be needed. in the coming months. to weather an impending economic downturn.

Last month, the The Bank of England said Britain would enter a recession at the end of 2022, and warned that inflation would reach 13% in October. Inflation rose to 10.1% in July – the highest level since February 1982.

A vital part of any discussion will be whether current commercial property leases are fit for purpose and whether it is time to explore non-traditional alternatives, such as turnover-based rents, that more effectively share risk and equity. reward between tenants and owners.

Financial leasing models have been used effectively in the retail sector for some time, where sales have grown at a faster rate than malls in recent years, CBRE 2019 Retail Ownership Perspective report displayed.

Billing leases are not without their challenges. There may be difficulties in arriving at the appropriate billing percentage in the first place and at the time of transfer of the lease. A more widespread adoption of this model would also require a change in the standard valuation methodology, for which the real estate market in general may not be ready.

Despite this, the transparency gained can bring real benefits. It enables quick responses, with sales data and trends analyzed on an ongoing basis, rather than when a tenant runs into trouble. It also opens the door to more active asset management, in which tenants and owners evolve their offer to adapt to market changes.

However, innovation cannot stop at leasing models. The lack of acceptance of the arbitration scheme suggests that honest conversations are taking place: we must seize this moment to promote openness, collaboration and trust in the retail real estate sector and in general.

That is one of the goals for which the cross-sector coalition, Platform Places, was created.

Bringing together retailers, local authorities, landlords, investors and community organisations, together with think tank Radix, the coalition puts forward actionable solutions to revitalize UK inner cities, make them more accessible and boost affluence. These are factors that are not only critical for growth, but also for combating a market downturn.

In July 2022, the coalition released its first report, A platform for placespresenting a set of proposals to put underused property back into use.

Measures range from creating a new High Street buyout fund, growth of the Heritage Development Trust, changes to business fee relief, and encouraging the Department of Grading, Housing and Communities to examine community leasing policies.

The plans focus on maintaining commercial viability for homeowners and investors, as well as renters, including smaller or community-run businesses. They are also based on scaling up successful case studies from across the UK, with projects in Oxford, Sheffield and Belfast.

Attention should be paid to the proposed measures and their potential role in bringing underutilized property back into use, creating new opportunities for owners and renters.

However, the most powerful aspect of the project is the coalition itself.

The group has partners from the public and private sectors, including the British Property Federation, members of the High Street Taskforce, as well as representatives from Legal & General Investment Management, Boots and Transport for London.

This type of cross-sector partnership approach will prove essential in the coming months, which will undoubtedly bring significant financial and operational challenges. By working together, rather than as adversaries, tenants and owners can put themselves in the best possible position to overcome these obstacles, while setting themselves up for future success.

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