For Restaurants, Rent Crisis Is More Important Than COVID-19 Vaccine

Part of It’s Crunch Time for London Restaurants

Update: On Wednesday 9 December, the government extended the rent moratoria until the 31 March. It says this will be the last time an extension is granted.

On Tuesday 8 December, as the first vaccinations against COVID-19 were administered, the U.K began what politicians are calling a long journey out of the coronavirus crisis. For restaurants, the effects of a full vaccine roll-out, which will not commence until the new year, could come too late.

Current government and restaurant industry thinking is that there will be a “return to normality” around Easter 2021. Before that, London restaurants, which have been open for just a week post-national lockdown, have three weeks until government legislation protecting them against eviction expires.

Throughout the whole of the pandemic, rent has been flagged as the issue that matters most: a solution that deals with unpaid rent debt accrued through months of closure in 2020 could save thousands of businesses and millions of jobs into 2021. To date, there has been no solution, such are the apparently mutually exclusive self-interests of tenant and landlord.

With just over three weeks until a new critical phase in the ongoing rent saga, the principal trade body for hospitality has outlined its latest plan to solve the crisis. Kate Nicholls, chief executive of UK Hospitality said it was the biggest threat to the recovery and future of hospitality — and that the sector was “on a countdown to a devastating rent tipping-point that will trigger a new year bloodbath [...] business failures and potentially hundreds of thousands more jobs lost.”

As well as rounding up the views of chefs and restaurateurs in recent days and digesting Nicholls’ latest comments, Eater spoke to Adam Walford, a commercial property specialist at London law firm Howard Kennedy, to better understand the implications for both landlord and tenant and what might happen next.

What is the current situation with rent owed by restaurant tenants to landlords?

The situation is broadly the same as it was in the summer: while some restaurant tenants have reached agreement with landlords over rent debt accrued in 2020 as well as put plans in place for 2021 and beyond, no “national solution” has been implemented. It means that, for many other businesses and property owners, it’s a waiting game.

All that currently protects restaurant tenants unable to pay rent during the coronavirus crisis are the so-called moratoria, which the government introduced in March, then extended in June (until September) and in September extended until 31 December. So, that protection is set to expire in a little over three weeks. And, as UK Hospitality said last week, restaurants and pubs are “still debilitated by severe restrictions on [their] ability to trade.”

UK Hospitality says that the total amount of “unsettled rent from the Covid crisis period within hospitality” is estimated at £1.6 billion, which it adds will increase further with December’s rent quarter payment date looming (25 December).

“The debt burden is mostly held by otherwise viable businesses that cannot pay rent bills due to lack of revenue during many weeks of closure and suppressed sales under tier restrictions,” it added.

What’s going to happen next?

Nobody knows. Yet.

Adam Walford of Howard Kennedy said the moratoria may well be extended, but that it will, ultimately, come to an end. The question then is, what happens when it does?

Across the industry, it is widely expected that the government will extend the moratoria beyond the end of the year, thus providing some extra breathing space into 2021.

If that does happen, the government will have again not dealt with the issue directly, but aimed to give the commercial parties negotiating a deal a fairer chance of reaching one than they might have with the ability of one to threaten the other hanging over that negotiation.

Koya, inside the City’s Bloomberg Arcade with a new expanded outside seating area — one of the best Japanese (udon noodle) restaurants — Koya, inside the City’s Bloomberg Arcade

What could happen in January if nothing changes?

UK Hospitality has said “many landlords have made it clear that they intend to use the end of the moratoria to issue winding-up petitions and eviction notices to tenants, both large high-street chains and individual businesses. The trade association is calling for urgent action by Government to preserve as many jobs and businesses as possible into 2021.”

Beyond January, even with an extension to the moratoria, what might happen?

Walford warned that the relative comfort provided by the protection against eviction may have meant that some businesses have either avoided or delayed taking the “drastic action” they needed to in order to ensure long-term viability.

What’s more, there’s a concern that some landlords may just be waiting until the inevitable end of the moratoria to apply more severe treatment to tenants who they may have perceived to have been exploiting the reprieve for the last eight months.

Walford was sanguine about the prospects of a deal now between those who have yet to reach agreement. “If you’ve not done a deal with your landlord already, then that’s either because you can’t, or the landlord is keeping their powder dry [for when they need to act,]” he said.

Why wouldn’t a landlord accept less rental payments if they could, especially if demanding full rent means they could potentially lose than tenant altogether?

Walford explained that it not merely a case of supply and demand.

For many landlords, yes, their bigger aim involves “placemaking” and keeping attractive and reputable restaurant brands in situ to raise the overall value of a given estate. Their goals are long-term so those landlords will be willing to negotiate a rent settlement. Or, like in the case of the Bloomberg Arcade in the City, a complete rent break for the whole of 2020.

For others, cash is far less important than the value of their property. Rent that isn’t paid does not affect the value of the property. A new lease, with a reduced rental value, could “crystallise a reduction in the perceived value” of the property. This is especially complex if that landlord has a mortgage on that property which is tied to its rental value.

In short, a lot of landlords are willing to take no rent, and, potentially evict the tenant (even keeping that unit empty thereafter) so long as they can preserve the value of the property.

In Walford’s words: “Landlords don’t need demand, they just need base value.”

What’s more, without any assurances on the long-term viability of certain restaurant businesses, landlords “may as well see what happens.”

What the chief executive of trade body UK Hospitality Kate Nicholls has said:

“There can be no more excuses about parliamentary time or available finance; this needs to be resolved, otherwise the support government has provided to the sector so far this year will all be in vain. The alternative is widespread business collapse and shocking job losses on an almost unthinkable scale. Unless this issue is resolved, there will be a bloodbath on our high streets and a much longer-term damaging impact on the UK economy.”

With restaurants potentially subject to “harsh” coronavirus restrictions until spring 2021, the trade body said extending these moratoria was “more important than ever.”

Chinatown London has reopened after coronavirus lockdown, with schemes like outdoor dining permits from Westminster council and the government’s Eat Out to Help Out discount giving the area an economic boost. — Businesses in Chinatown were expected to pay 50 percent of rent in the summer for the period in which they were closed for the first national lockdown in spring

What is UK Hospitality’s proposal?

The trade body has laid out a seven-point plan to “solve the crisis.”

Extend the debt enforcement moratoria until June 2021 — once more preventing landlords from being able to evict restaurant tenants which have not been able to pay rent due to COVID-19. It also prevents them from using heavy handed tactics while threatening tenants with eviction. This will mean landlords enter into “meaningful discussions.” Plus, tenants are obliged to pay a minimum of rent debt (20 percent) in order gain this extended protection.
Set level for “rent forgiveness of 50 percent” — Government should make clear that they expect landlords to “forgive at least 50 percent of rent debt for periods when businesses were forced to close” offset by tax reliefs for landlords, contingent on rental agreement for at least the next financial year (2021-22).
Tenants to make a reasonable offer of rent debt payment — onus on tenants to make a “reasonable debt repayment offer,” of at least 25 percent, “subject to landlords making an offer of at least 50 percent “forgiveness” (set out in point 2).
Introduce 10-year low-cost government-backed property bonds for tenants who want to meet minimum payment thresholds but are simply unable to do so. Loan the restaurants their 20 percent payment, with minimal interest on repayments.
A reset rent review — mandatory where landlords have not made a concession to the tenant (per point 2).
A break clause with a 50 percent reduction in rent debt: tenants should have a last resort right to instigate a break clause to exit the contract at the end of June 2021 and have half of their rent debt written off. Landlords should be able to use a break clause at this point, too
A long-term commercial property review to address longer-term, structural property market flaws and anomalies, including, for example, upward only rent reviews.

What chefs and restaurateurs are saying

Mandy Yin, Nasi Economy Rice, and Sambal Shiok

Feeling completely wiped out emotionally due to ongoing difficulties with @nasilondon landlord. It is a Jersey-based company with around 50 commercial tenants across London. It is insisting on being paid 100 percent rent even though my business has been decimated by Covid.

At the moment, the only concession the landlord has given is to waive the 50 percent still technically due for Q2 and Q3, however is demanding full 100 percent rent for Q4 2020. In fact it has today deducted the entire quarter’s rent (£8,000) from my rent deposit, and is insisting that I top up the rent deposit next year. It is also insisting that full rent will be due in Q1 and Q2 2021. I already know I will not be able to afford topping up the rent deposit nor afford 100 percent rent any time next year/at all and have told the landlord so, but to no avail. It is still demanding it!

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A post shared by Sambal Shiok Laksa Bar (@sambalshiok)

James Lowe, Lyle’s, Flor, ASAP Pizza

This is a concern, but the game hasn’t changed — all landlords are aware people are trading at a fraction of the same time the previous year. I would imagine most people would have already been in negotiation for a solution to their rent for 2021. We have been aware of the fact we will be facing significant financial difficulty until the end of 2021 since this spring.

Missy Flynn, Rita’s

[We need] a fucking plan!! Rent relief would save a LOT of businesses. I don’t hold my breath but leaving this to landlords is a dangerous game. We’ve been fortunate so far in that we have a clear and direct line of communication with our current landlord but some people are being treated appallingly and the government needs to intervene.

Andrew Wong, A. WONG

LOTS OF PLACES ARE GOING TO CLOSE DOWN. I think the important thing to remember is that NO ONE will win from this year: restaurants, landlords, developers, restaurant groups. Everyone is losing. I understand that some landlords have their own loans that they need to honour. The line that I try to take with our landlord is that: I don’t want you to go bankrupt, at the same time, we need to make decisions that allow our restaurant to continue trading into 2021.

Dan Morgenthau, Woodhead Restaurants (Quality Chop House, Quality Wines, Portland, and Clipstone)

I am very glad December is going to be the last month of 2020 though I fear that January and February may be the most difficult months yet for the sector. There’s still no government strategy for dealing with the standoff between commercial tenants and their landlords. We need clarity and forewarning.

Beyond this, [the government] need to address the structural problems that meant that many good hospitality businesses were struggling to be profitable even before the start of the pandemic: an outdated rental system that’s inherently tilted in favour of the landlord...”

...I fear the proximity of the vaccine will be justification for a hands off approach to an industry that’s crying out for support.”

A selection of dishes at Normah’s Cafe in Queensway Market, Bayswater — one of London’s best-value restaurants is struggling to recover after the coronavirus pandemic forced its closure in March 2020. It reopened in August 2020. — Normah’s

Normah Abd Hamid, Normah’s

I’ve been doing a lot of analysing and thinking, besides rent, other real concern is delivery charges. When government imposed lockdown number 2, we were only allowed to trade by doing takeaway and delivery only. But the costs that have been imposed by delivery services is around 30 percent. We don’t want to increase our price on delivery too much but if we don’t, it will affect our margin.

Louis Wainwright-Vale, Element Coffee

Landlords will need to reduce rent or face an even bigger loss in earnings. There is no other solution. What we can’t allow is mass failings of businesses who can’t afford extortionate rents.

Koya in Soho, the perfect breakfast spot, that forms part of the best 24 hour restaurant travel itinerary for London — where to eat with one day in the city — Shuko Oda, Koya

John Devitt, Koya

Our landlords have been very supportive and thus I have been one of the lucky ones not to have to consider this.

Gabe Pryce, Bodega Rita’s

I think landlords are going to have a choice. Be realistic and work out helpful solutions, or kick out tenants, close businesses, get in chains, make it less desirable and in the long run turn the property they own and its surrounding area into a turd. They could well lose the thing that makes the centres of our cities so valuable.

Farokh Talati, head chef at St. John Bread and Wine in Spitalfields, east London. Just one of the restaurants involved in the Eat Out to Help Out scheme, which offered a £10 discount for diners in restaurants across the U.K. in August to help boost economic recovery in hospitality after months of coronavirus (COVID-19) lockdown — Farokh Talati, head chef at St. John Bread and Wine in Spitalfields

Trevor Gulliver, St. John Restaurants

As a national issue, you would hope that the noises made by landlords and their representative bodies would turn into positive action. It’s very much their call, rent paid monthly, no more upward-only reviews, stepped turnover rents, sensible break clauses, covenant issues addressed, landlord investment in the operator and so on. How great would it be if one of the big estate owners actually did step forward!

Dan Willis, The Clove Club

More support for tenants in terms of rights and imposed rent reductions across the industry would really help.

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Coronavirus Vaccines Could Be Too Late to Save Restaurants