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It’s safe to say the hospitality sector has seen its fair share of stressors in the last three years, including high inflation rates, soaring interest rates, rising utility costs and an increase in the cost of raw materials, to name a few.
The hike in business rates, which is expected in 2024, coupled with the possible end to the rates relief scheme, may just tip hospitality businesses over the edge.
The rate changes will also be unwelcome news for landlords who will ultimately inherit the liability for business rates should they lose their tenants, along with liability for other costs such as insurance and repair.
With over 17,000 shops closing in the UK in 2022, how have we seen the market respond to the changes in the hospitality sector? Myerson Solicitors' commercial property team investigate.
Landlords and tenants have had to adapt
Landlords have been offering up measures designed to ease the pressure on their tenants, such as forgiving COVID arrears, changing fixed rents to turnover rents for an agreed period, agreeing service charge caps and restructuring leases.
In return, we have seen tenants agreeing to give up their break clauses, agreeing to longer leases and refreshing their premises in an attempt to attract more customers and increase footfall.
It is clear that both parties are having to adapt to survive, which is proving to be a sensible way forward not only for the tenant’s survival but also to save the landlord from the headaches of being left with empty premises.
Landlords want to avoid a landslide
It is apparent, however, that landlords are nervous about these concessions becoming the market norm, and property lawyers have seen an increase in the demand for side letters to document these concessions in order to keep the terms confidential between the parties, as opposed to documenting them in the lease itself.
For the tenant, the latter is preferable as side letters often do not benefit successors in title and assigns, meaning the concession will fall away on the sale of the freehold and, on an assignment of the lease, the assignee will be taking the lease on much different and, most likely, less attractive terms.
Levelling up the High Street
In a further attempt to save the high street, the Government has recently introduced the Levelling Up and Regeneration Bill, which, if passed, will give local authorities the power to put empty high street premises into mandatory rental auctions without the landlord’s consent, amongst other things.
The Government’s stated purpose of the Bill is to “drive local growth, empower local leaders to regenerate their areas and ensure everyone can share in the United Kingdom’s success”.
The first reactions to the Bill by landlords are that they strongly oppose the proposals and view the powers as a fundamental interference with their basic property rights.
Given the potential for litigation arising from the exercise of these new powers, it remains to be seen whether local authorities will actually choose to use them or not.