Preparing commercial landlords for the end of furlough

Commercial landlordism has taken, and will continue to take, a huge hit as a result of the COVID-19 lockdown. But instead of burying your head in the sand, you should be thinking ahead to how you’re going to manage matters in a post-furlough world.

Despite the recent extension to the furlough scheme of March 2021 offering some reprieve for businesses and, ultimately, landlords everywhere, it has only bought companies another month to plan ahead. Case numbers are going down but they are still nowhere near pre-lockdown levels.landlords emerging from furlough

While the UK government may have no choice but to further extend the furlough scheme past the end of April 2021, there’s absolutely no guarantee that this will happen. That means commercial landlords, in particular, have a short window to get their business in a prime position to survive.

Stats from the Centre for Economics and Business Research say that the lockdown is costing the UK economy £521m per day, has seen 6 million workers placed on furlough and has cost us one quarter of our total businesses. These figures should be enough to scare any landlord into pre-emptive action because, ultimately, it’s commercial landlords who are going to face the brunt of the fallout.

Why no furlough is going to be difficult for commercial landlords

While not every commercial landlord will be affected, the chances exponentially increase for companies that have the most properties. While the furlough scheme is keeping many businesses afloat while they either run reduced hours (or, in some industries, no hours at all), the stop in support is going to cause a cash flow shortage that may not be made up by customer demand.

While we’re all looking forward to the end of restrictions, a drop of full social distancing restrictions is still likely to be far off and, as such, customers aren’t going to return in droves to commercial properties anytime soon. Those running retail shops are almost assuredly going to see a drop in footfall compared to the pre-pandemic times; whereas those renting office spaces will see businesses realise that they can save money by having staff work at home. You may already have had to deal with this problem.

So weather it is driven by money or need, there’s a good chance you’re going to start seeing a lot of customers try to change or question the terms of their lease once the furlough scheme ends. It’s why good legal representation for commercial landlords is going to be so important going ahead.

What you currently can’t do as a commercial landlord

The situation is made more difficult by the fact that commercial landlords are facing restrictions on what they can and cannot do when a tenant can’t (or is refusing to) pay rent.

A number of laws have been temporarily changed to give renters more protections against legal action by landlords over non-payments. These include the Coronavirus Act 2020 – which stops landlords from pursuing forfeiture in the result of no payments by tenants – and restrictions on winding up petitions brought about by the Corporate Insolvency and Governance Act 2020.

Even if you can get a tenant to court after the required six months’ notice, a judge is likely to throw the case out if the tenant can demonstrate that their business has been impacted by COVID-19. As almost every business in the UK has been affected, this makes the court route a legal improbability for landlords right now.

In addition to all of this, there are also regulations in place on Commercial Rent Arrears Recovery (CRAR) that requires tenants to have accrued over 365 days of outstanding rental debt before any action can be taken.

There can be no doubt that many tenants are undoubtedly running businesses that are struggling. However, many commercial landlords are finding that tenants who were a problem before the pandemic when it came to payments are now bringing them even more hassle as they take advantage of these temporary measures to operate largely rent-free.

What the future holds for commercial landlords

With so many of the cards stacked against commercial landlords right now, it’s important to take a step back and look at what can be done once the furlough scheme ends.

One positive to take away from the furlough scheme’s end is that it will likely correlate with the end of the temporary restrictions on what legal action can or cannot be taken against non-compliant tenants. Without many of these protections in place, you’ll be free to tackle the worst offenders once again.

It’s also likely that you have seen or will see tenants try to change the terms of their lease or even reduce how much space they rent. With many businesses now giving their employees the choice or working from an office or working from home, it’s undoubtedly going to reduce the amount of space that tenants need.

One upside from this situation is that social distancing measures ensure that there still needs to be sufficient space between desks so this may not be such an immediate problem for commercial landlords. In fact, some businesses that utilise a large amount of employees in a small amount of space – such as call centres – may even be forced to increase the size of their rental space to continue operations.

Additionally, it’s also very likely that we’re going to start seeing bigger businesses look to operate less centralised offices and instead move to smaller, regional offices – another possible opportunity for those with such properties in their portfolio. And there is also an opportunity for renting out smaller offices or even desk space as people look to escape from the chaos and noise of home working.

Regardless of these positives, it’s likely that you’re going to see more tenants try to hold out on payments for as long as possible and you need to be prepared with the right mentality that comes from having smart legal minds at the other end of the phone that you can rely on.

Taking proactive steps

Despite all these negatives, it’s important to maintain a sense of balance throughout it all too. Many people and businesses are struggling right now. While the temptation to relentlessly pursue tenants is strong, there’s a lot to be said for a more compassionate approach as a way of building loyalty and trust with your tenants.

People are far more likely to work with you and by sympathetic to your concerns if you can show the same approach in your communications with them. A more discerning approach to how you talk to your tenants is certainly going to be key in how cooperative they will be in helping you back by paying rent when they can.

One proactive step that can be taken right now by commercial landlords is to start thinking about revising the fine print in your tenancies. We’re going to see more tenants seek out more flexible terms once their tenancies end – such as shorter leases and clauses centred around allowing tenants to back out under certain conditions. How you navigate these areas is going to have an impact on the likelihood that your tenants are going to stay with you or move onto a landlord who is giving them a more flexible deal.

It’s also important that you have protection in place once the temporary measures and furlough end. Make sure you have rent guarantee insurance in place to ensure that you can distribute actionable section 21 notices when you are able to do so again.

Foys can help you navigate these tough times

One last factor that is going to determine your company’s outcome is the strength of your legal representation. From the pursuit of late or non-payments from tenants, to the drafting of new template leases, you need solicitors with the experience, flexibility and strategic know-how to be a beacon in these dark times.

There’s no question that our experienced commercial property solicitors are exactly who you can trust and rely on. Our team assists across a wide range of commercial property matters – with a speciality in resolving issues between landlords and tenants.

We will not only offer you clear and consistent legal advice that cuts across the lines of jargon, but we can draft new leases to suit these differing times and help you end disputes with your tenants through proactive mediation and clear communication. Our goal is always to get the maximum gains possible for our clients without the need to go through expensive court proceedings.

Additionally, we can help you in matters of asset management and property refinancing which may well be an increasingly important area for commercial landlordism during these tough times ahead.

Our goal at Foys is to ensure that our clients feel safe in our hands and that they know that someone has got their back and best interests at heart when dealing with these difficult matters – and someone who they can trust to give the right advice at the right time.

We provide all of our first-time clients with a FREE initial consultation so that you can have first-hand experience of what it’s like to be part of the Foys family without paying a penny. To start experiencing quality legal advice you can trust as soon as today, just get in touch with Foys’ Commercial Property Team today by phoning us on 01302 327136 or by contacting us via our Online Form.