It’s been an incredibly frustrating 12 months for a number of retail landlords who have seen significant reductions of rental incomes since the start of the COVID-19 pandemic.
Encouraged by the package of support measures put in place by the Government, many tenants have turned the tap off on their cash outflows whilst they await a return of footfall back to pre-pandemic levels.
Add to this the High Court ruling in favour of New Look, following the challenge to its restructuring plan by landlords, which has likely served to embed the role of the Company Voluntary Arrangement as a vital tool in any restructuring practitioner’s armoury and it’s easy to understand why retail landlords feel that they are rather unsupported at present.
The balance sheets of retail and leisure tenants are likely to be swollen with historic tax liabilities, rent arrears, supplier stretch and rolled up financing costs, all of which need a combination of professional support, time and stakeholder collaboration to navigate through.
The above challenges naturally lead to an impact on the underlying value of retail and leisure assets which is likely to concern financial investors to differing degrees depending on where the economic value now breaks.
However, as businesses seek to reopen and rebuild following the pandemic, the patient and supportive landlord community will finally start to see their rent rolls recover and, hopefully along with it, their valuations.
A range of options will exist for dealing with tenant arrears from formal insolvency processes at one end of the spectrum to informal arrangements at the other.
Where the underlying covenant strength of the tenant looks okay, the most creative landlords will seek to use the arrears position to proactively engage with tenants to regear and extend leases and informally compromise the arrears position and agree scheduled repayment plans.
Some landlords will agree to a move towards turnover rents to allow greater flexibility and alignment with their tenants’ businesses.
After a year to forget, landlords, tenants and other financial stakeholders will need to work together to help each other towards consensual solutions which enable the structural financial legacy of COVID-19 to be worked through.