When Restaurants Reopen, How Will They Pay Their Rent?

As the government sets ever nearer dates and Boris Johnson pushes forward in his hope to reduce social distancing measures, restaurant reopening is front of mind. On 4 July, some restaurants may be able to reopen for dine-in customers. 10 days earlier, on 24 June, the next three months of rent are due. Here’s an explanation of how rent impacts restaurants, why it has been so important during the pandemic, and what the industry needs to happen now and in the coming months.

BACKGROUND

How does restaurant rent normally work?

Restaurants are almost always tenants of landlords, whether private individuals or commercial companies. The most common arrangement is quarterly rent — three months paid in advance.

This year’s first quarterly rent payment fell at the end of March, days after the government mandated the closure of all non-essential businesses, including restaurants.

The next quarterly rent payment is due on the 24 June for the months of July, August, and September.

Why is rent so important and why did the novel coronavirus pandemic affect it?

Together with staffing, rent is the biggest fixed cost for most restaurants. When they cannot trade and do not receive revenue, their ability to pay one of their two biggest bills is extremely diminished, if not extinguished.

More, because of the nature of the pandemic, and the length of time it has interrupted a restaurant’s ability to generate revenue, even if in the unlikely event a restaurant had cash reserves, it is likely they would not have had enough money to last.

In short, restaurants have not had enough money to pay their rent.

At this point, if they were unable to pay it at the time it was due, on 25 March, restaurants still owe rent for the months of April, May, and June.

They are also obliged to make their next rent payment (24 June) before the earliest date (4 July) that the government says they can reopen for dine-in customers.

THE PANDEMIC

What has the government done so far?

According to commercial property specialist Adam Walford at the law firm Howard Kennedy, the government — fundamentally a public entity — has adopted a largely non-interventionist policy because the legal nature of the rental agreement is a private commercial bargain between tenant and landlord. It has not formally “sided” with either the tenant or landlord, instead implementing measures designed to facilitate negotiations between the two parties.

The government has done three major things:

March: Implemented a “lease forfeiture moratorium” from the beginning of the mandated closure period on 20 March until 30 June. It prevents landlords from evicting tenants which have been unable to pay rent because of COVID-19. Its effect has been to delay rent payments, not necessarily cancel or write them off.
April: Implemented legislation to prevent landlords from using intimidating tactics designed to force tenants to pay rent, via the threat of eventual eviction. This fell short of the “enforcement moratorium” many in the industry called for, and was described by one high-profile restaurateur “as only part of the solution.”
May: A formal though voluntary “code of practice” and guidance to facilitate “fair and transparent discussions” between landlords and tenants over rental payments. It aimed to allow “breathing space” and to ensure “no one part of the chain shoulders the full burden of payment.”

The government has never said what it believes should be the outcome of the negotiations, or indeed what should happen with rent owed. The measures have over the last two months been described by industry leaders as “helpful and pragmatic”.

This week the trade body representing the hospitality industry said that the government’s strategy hasn’t worked.

What is the situation right now?

At this point, restaurant tenants still owe the rent stipulated in their existing lease, unless they have reached a new agreement with their landlord.

The government confirmed at the time of the publication of the code of practice: “Rent is still owed, and those tenants who are able to pay some or all of their rent are expected to do so.”

In reality, many restaurants will simply not be able to pay that rent.

The dilemma is therefore quite straightforward: Landlords will accept this, if they are financially capable of doing so, or the restaurant will have to default on that payment and close permanently.

One key point which remains something of a mystery to all parties is why the government has not yet extended the forfeiture moratorium beyond 30 June, at the very least to the earliest date it has set for restaurants to reopen on 4 July. It can do this without implementing extra legislation.

How much agency does a landlord have?

Some, but not all.

Landlords, as members of the restaurant industry have been pointing out since the closure, are not independent decision-makers. They, too, need either financial or legislative protection against reduced or cancelled rent payments. In many cases, a landlord owes money to a bank or an investor. Alone, they cannot necessarily make a decision on the future outcome.

What’s more, because of the scale of interruption and the predicted economic impact of the pandemic, it is not necessarily within the interest of a landlord to remove its tenant from a lease: Demand for commercial property in the wake of this crisis could be much lower that it was before.

Does it make sense to remove a tenant — which could in theory (eventually) be able to pay some rent — when there is no guarantee that another tenant will replace it paying “full” rent?

THE FUTURE

What does the restaurant industry want the government to do?

By far, the most urgent, pressing, and straightforward request from the industry is for the government to extend the “lease forfeiture moratorium” — the period in which tenant and landlord can negotiate — from 30 June until the end of the year.

In other words, the least the government can do is give those parties more time to find a solution, if that solution will not be decided on their behalf.

Which models have been proposed for the future?

While some restaurants have been able to agree individual terms with landlords, there are two main options proposed, which would be applied via legislation and financial support across the board:

1. Trade body UK Hospitality’s proposal is a three-pronged solution:

Tax credits for landlords to incentivise rent waivers for tenants.
Property “bounce back bonds” to cover lost revenue. These are government reimbursement in the form of low or zero interest loans, designed to cover approximately three months of rent, depending on when the given tenant is able to recommence rent payments.
The introduction of a “furloughed space grant scheme”, which would require the government to pay some or all of the owed rent on behalf of the tenant, an idea borrowed from Denmark.

2. Pressure group Hospitality Union proposes a so-called “National Time Out”, which was first introduced in April and which in effect cancelled, or pushed back, all rent payments by nine months. Pre-crisis rental arrangements would not resume until 24 March 2021.

This week, that proposal has evolved to suggest a rent-free period of between three and nine-months, depending on what capacity any given business was able to trade through the pandemic. For example, if a business has already reopened for takeaway and delivery, then it would qualify for a shorter rent-free period than a restaurant which may not be able to reopen until July.
Moving forward, between reopening and March next year, a restaurant would either: pay rent based on a percentage of turnover — effectively 10 percent of the money it is making. Or: 25 percent of the rent as stipulated in its existing lease agreement.
Full details of that proposal can be found here.