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Ask An Expert: Rent
Although extensions to the UK government’s rent moratorium have continued so far, when the end comes, it will represent a cliff edge. Unless agreements can be struck with landlords, or the government intervenes, some operators could be liable for a year or more of back rent, which could be catastrophic, as Kath Hudson reports
With the end of the rent moratorium inevitable at some point – potentially as early as the end of March this year, the health and fitness sector is urgently calling on the government to intervene.
Without targeted support, we could see the end of some previously thriving fitness businesses, which will not be able to afford a lump-sum payment of one year’s rent, when they’ve been forced to close for eight of the last 12 months.
Even operators who can afford the back rent payments are reporting that the cash hit will adversely affect their expansion plans going forward, which will ultimately impact the health of the nation.
Industry representatives are working hard to lobby government to give the sector the type of targeted support the hospitality industry has benefited from and asking for an extention to the rent moratorium, VAT breaks and rate relief.
The latest figures from ukactive show that 400 facilities have already closed permanently.
In the public sector, the District Councils Network estimates £411m has been lost during the pandemic by leisure centres run by district councils and says many won’t survive the third lockdown without rescue funding.
This means unless the government intervenes, many leisure centre swimming pools and gyms could be lost forever.
What can be done to resolve the rent issue and ensure the industry doesn’t suffer an economic ‘Long COVID’, so we can continue to support the health of the nation? We ask the experts.
One of the most significant costs the sector faces is rent and without further targeted support from the Government to help share the burden more equally, the consequences will be dire for the industry. Put simply we think it’s unreasonable that operators should have to pay full rent for periods when they have been forced to close and been unable to trade. Despite making this point to landlords very few of them have made meaningful concessions and instead are sticking to the letter of their contracts.
By the end of March 2021, when the current moratorium expires, PureGym will have approaching £40m of rent arrears relating to full rent for periods where we have had zero or significantly reduced revenues. While we are very grateful for the measures the Government has already put in place, it isn’t nearly enough to cover what it is costing our sector to stay closed. The furlough scheme and rates support cover less than 25 per cent of our running costs. A closed estate significantly erodes our capital base. Burning through capital will limit operators’ ability to invest in sites and deliver on expansion plans.
We need support from the Government so that when gyms are given the green light to reopen, we are able to prioritise our investment on those that matter the most: our members and our teams.
The gym and fitness industry has demonstrated its resilience by springing back from two lockdowns and underlying demand for gyms remains strong; however, without targeted support for the worst-affected sectors which is proportional to the extent of lost revenue, we are deeply concerned about our industry.
We have already seen a number of larger operators face business failures or major restructurings and lots of smaller operators have closed their doors. These were strong and successful businesses and would be again with the right, targeted support. I hope the Government recognises the importance of gyms as a contributor to the economy, an important employer of around 500,000 people and a provider of an essential service to millions across the UK. This sector is facing the very real prospect of economic ‘Long COVID’ in the form of closed facilities, under-investment and lack of expansion.
We’re calling on the Government to support our survival, recovery and development with measures which will – once lockdown ends – allow the sector to thrive again and repeat the 6 per cent year-on-year growth it demonstrated previously.
We’ve been in dialogue with the Government to stress the need for three key measures of support to urgently meet the cashflow crisis approaching on 1 April. Firstly, extending the business rates holiday beyond March 2021 by one year. Secondly, making changes to rent legislation and arrears. Thirdly, providing the physical activity sector with the reduction in VAT already afforded to hospitality and tourism.
We’ve proven our sector’s ability to work constructively with landlords on this issue, but now the Government must establish a permanent solution to tenant/landlord agreements on rent arrears. We want the Government to extend the moratorium for evictions on the basis of rent arrears beyond 31 March, by two quarters to 1 Oct 2021. If these issues are not addressed there is a serious risk that the subsequent action from landlords will result in closures.
In order to assist landlords and tenants to come to an equitable agreement on the treatment of rent during shutdown and the recovery period, we have proposed landlords grant tenants a rent-free amount, equal to 50 per cent of the rent payable during the shutdown period, with the remaining rent for the shutdown period to be deferred.
In addition, we need to see tenants granted a rent deferment equal to 50 per cent of the rent due during the recovery period, with the remaining 50 per cent paid on a monthly basis. And all deferred rent should be repaid on a monthly basis over a period of two years from 1 April 2020, or lease-end if sooner.
This is such a vital area of agreement. There have already been a number of high-profile business failures, and further closures, due to landlords pursuing tenants, will lead to an under-supply of facilities and services at precisely the moment the UK needs them for its health recovery.
We need formal legislation around the Code of Practice for commercial property relationships and longer term reform on the Landlord and Tenant Act. The most significant of our franchisees’ arrears is in their rent payments, ranging between £45,000 and £100,000 depending on their property and location. We’re approaching a year since our initial closure and still a large proportion of landlords refuse to enter any meaningful dialogue with our franchisees. We need legislation to guide a clear support process for both parties.
An effective example is the relief for commercial tenants in Australia, where landlords are mandated to provide a proportionate rent cut based on the reduction of the tenant’s trade and turnover due to COVID-19. They then must provide 50 per cent of the rental reduction by way of a waiver and the remaining 50 per cent as a rent deferral to be paid by the tenant over the remaining term of the lease.
In addition, we believe the government needs to provide a 12-month extension of business rates relief, access to an additional grant of up to £25,000 with no cap on rateable value, a VAT rebate for the sector and a VAT reduction on gym memberships passed on to the consumer to stimulate growth on reopening.
Our clubs are losing income of anything between £30,000 and £100,000 a month during closure and by March, will have been able to trade for just over 100 days, and then only in a suppressed way with reduced capacities. Without any formal legislation or support, there will be widespread closure of facilities, loss of jobs and millions of people losing their community gyms. This would be of huge detriment to the nation’s ability to prevent and manage chronic disease and improve immunity as we emerge from the pandemic.
The rent moratorium has been a lifeline for occupiers across all leisure and hospitality businesses who have suffered the longest forced closure. However, with the end quickly in sight and no guidance on how to support the businesses going forward, this is a slow motion car crash waiting to happen.
Working with both landlords and occupiers, I can see both sides of the coin. The tenant has no income as they have been forced to close and, understandably, are unwilling to part with their hard earned savings to pay their rent arrears in full. But the landlord sees occupiers having had additional government support measures to draw upon, which were not available to them. They have their own bills to pay, such as debt repayments for property lending and therefore need to receive some rent to pay this. Some landlords have behaved appallingly, but for some rent is as much a lifeline for them, as customer spend is for tenants.
Throughout the last year we have worked with both landlords and tenants to help find a solution. Many landlords are willing to find an amicable solution, where they absorb some of the impact of the pandemic, writing off part of rental arrears in exchange for the balance being paid now, or a least a payment plan in place. Some have sought to hedge their bets by agreeing to write off all arrears in exchange for an additional rent review in 2022 when market conditions are expected to have recovered.
When the government announced this moratorium I very much doubt they anticipated it lasting a year and the problem has now become too big for government intervention. While it has said it intends to look into outdated property legislation, I strongly suspect this will focus on the upward only rent review provision in leases rather than the rent arrears conundrum.
The Australian model where the rental burden is shared 50/50 while the business is in a period of enforced closure and the tenants’ repayments can be made in instalments looks like a good compromise, but we may have gone too far down the line now for the UK Government to consider a scheme like this.
In all likelihood, what will happen if the moratorium ends in March as expected is that landlords and tenants will be forced to have a proper dialogue. I predict that around half will be able to agree on something that each side can stomach. Around a quarter will end up doing some form of restructuring process – CVA or similar, which will ultimately deal with the arrears, and the rest will go to legal proceedings driven by landlords. My best advice for both sides would be to try to reach an amicable official agreement sooner rather than later.
