Hospitality leases in a post-pandemic world

Our hospitality industry has been hit with a unique set of stressors post-pandemic: high inflation rates, soaring interest rates, heavy utilities costs, a fall in staff availability (due in part to Brexit) and an increase in the cost of raw materials. Coupled with the knock-on effect of the cost of living crisis, this has led to a grim set of circumstances for an industry that relies on people having money to spend on leisure. Figures show that between January and March this year six restaurants went insolvent daily.

But it isn’t all doom and gloom. The market has started to respond to the changed set of circumstances.

How did landlords respond?

Many landlords stepped up to the plate and offered measures designed to ease their tenants’ outlay burden – forgiving Covid arrears, changing fixed rents to turnover rents for a period of time and restructuring leases to provide for fixed rents to the end of leases with a turnover slice on top.

It helps when tenants have something to offer too – ideas range from a refit/refresh to a newer younger version of the brand (very popular with shopping centre landlords where this can attract more customers and increase footfall in the centre), foregoing a break clause (unsurprisingly popular as landlords gain more certainty of income continuing) and signing up for longer leases (either through surrender and regrant or a reversionary lease).

Landlords may appear benevolent in their desire to help but it makes sense for them too. If the tenant survives, they have avoided business rates liability and the headache of empty premises. This includes everything from securing the site to reletting costs and having to give rent-free periods, always assuming the landlord can find a new tenant. Many restaurant and retail premises on high streets across the UK remain shuttered after previous tenant insolvency.

Changing circumstances

The results of these changed circumstances in new lettings in 2023 are starting to appear. New leases are being suggested on turnover rents throughout, offering comfort for the tenant during uncertain times and security for landlords that tenants may survive lean periods and an opportunity to reap with them in good; or combination leases of a basic rent plus top slice turnover on top. Rates vary between 5 and 10%. Caps and collars (where minimum and maximum amounts of turnover rent payable) can be used, as can staircasing methods (where the percentage of turnover increases over a set period in the lease). The better the tenant covenant and brand, the more muscle it will have.

In other areas, tenants are arguing successfully for service charge caps to keep a lid on expenses and arguing for rent suspension during any period of future pandemics; however, this issue remains sensitive with landlords. Lease lengths have become shorter, part of a trend that began years ago but that’s accelerated now. Rents can be payable monthly, meaning tenants don’t have to find the whole rent upfront each quarter as was previously the standard.

Many of these arrangements are done on a one-off basis to attract a good tenant or agree a deal during difficult times. Landlords are nervous of a landslide towards these concessions, increasing the pressure that they become market norms or having to make them available to all new tenants. Measures being taken include putting them in side letters and so keeping them off the lease or having leases redacted at land registry so those terms aren’t discoverable to others looking at leases recently agreed. For tenants, the latter is preferable as side letters often become a whole negotiating ground in themselves with landlords preferring that they don’t bind successors in title (so the tenant’s concession would fall away on sale of the freehold) or assignees of the lease (meaning that on sale the tenant has to offer a quite different form of lease) and can be consequently difficult to settle in the lease negotiations.

It is an interesting period where landlords can’t just quote “institutional lease” or “take it or leave it” anymore. Both parties are having to adapt to survive and, by that, are forcing interesting changes in the market and starting to disrupt the norms.

If you have any questions about your new proposed hospitality lease or how you can better its terms, please contact Lisa Raymond.