In Defence of Landlords

27th June 2020

Overview

Four words I never thought I would say. I may even be contradicting the spirit of a preceding article in which I – arguably fairly – labelled commercial landlords as “unscrupulous and unforgiving” (‘How To Run A Successful Restaurant’, 11th May 2020). 

But as the date for reopening our hospitality venues draws near, the onus to ensure our beloved pubs, bars, restaurants and cafes remain profitable, and therefore open, is disproportionately falling to the Landlord.

We all recognise Rent as being the gravest concern for hospitality businesses and the longevity of their future in post-lockdown, ‘Covid-secure’, times. But there must be a fair and reasonable apportionment of responsibility between a Landlord, and the flexibility of its rental expectations, and a business owner’s own commitment to driving enhanced efficiencies and cost-saving practices within their businesses, if they are to survive the challenges ahead.

 

COST CONTROL & COVID-19

Covid-19 has disproportionately affected hospitality businesses by reducing the number of guests that can be served within the same operational space, and increasing the number of staff it might take to serve them safely. The financial implications of the ‘new normal’ are therefore significant and must be mitigated by the business owner, irrespective of its rental commitments.

 

Rent Is A Fixed Cost

Having a discussion with the Landlord about managing rental payments over the coming months could bear results that alleviate some of the strain. However, business owners should exercise extreme caution before agreeing any long-term changes to their Lease terms. Whilst a turnover rent might look like an attractive option in the short-term, once social distancing is no longer required turnover rents could represent upwards of 20% of monthly revenue and be in place for the next 3 or 5 years, draining profit margins and blocking the road to recovery.

An informal agreement to apportion the rent according to sales projections for the remainder of the financial year, for example, would be a more dynamic solution that could protect the business in the long-term and represent a viable option for the Landlord and its creditors.

 

Shock Absorbing

Most hospitality businesses have had ample time to reconfigure their floor plans and are now able to calculate the reduction in their sales capacity. UKHospitality Chief Executive Kate Nicholls estimates that social distancing of 1 metre will result in around a 30% drop in sales capacity of most hospitality venues (‘UKHospitality reaction to hospitality reopening announcement’, 23rd June 2020). 

A 30% drop in sales capacity represents around a 5% increase in the rental expense of a food and beverage business when expressed as a percentage of turnover. Despite seeming unfair for the Tenant, especially in cases where the Landlord has provided little to no good faith in shouldering some of the burden, the 5% rental spike can be absorbed.

Having a complete set of financial and operational tools in place to manage and maintain the most efficient business practices will generate at least a 1% improvement to food, beverage and labour costs. The remaining 2% must be saved from other expenditure, to comparatively break even, or taken straight off the bottom line as a loss, for as long as social distancing, or Covid-19, remains a threat. 

Implementing enhanced sales strategies, costings worksheets, recipe cards, stock and inventory control procedures, better training for staff and consolidating suppliers to drive prices down on volume purchases are just a number of ways to achieve small but consistent improvements across the P&L. Operators must invest the time and resources needed to implement the full range of these tools rather than simply pointing to the government and to the Landlord to magic-away their financial worries.

Summary

The good news for growth-led operators is that the pandemic might inspire a rental revolution that was arguably a long time coming. The supply and demand of prime real estate could completely invert, as working from home becomes the new normal and commercial office blocks stand empty. Lease structures of the future are bound to offer greater flexibility for the Tenant, with Rent fixed at a standard rate for longer, with fair and equitable rent reviews and without early escalation clauses.

But for those operators that have years left to run on their Leases, driving enhanced efficiencies within the business will be far easier, and yield far greater results, than achieving a rental reduction from an understandably nervous Landlord.

 

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