Unprecedented is a word that’s been used so much in the past few weeks it’s lost of much its intended impact.
Yet it’s a reasonable claim from Chancellor Rishi Sunak that the package of emergency measures he introduced last week were indeed without precedent, not only for a Conservative government, but from any government in history.
The measures, including £330bn in government-backed loans, a moratorium on repossessions, and a jobs retention scheme which guarantees laid of staff receive 80% of their salaries, are laudable for their scale and generosity, as the government attempts to blunt the economic impact of the crisis.
Inevitably though, with reactive, emergency legislation, there is plenty of detail that still needs to be fleshed out.
For Howard Kennedy partner Adam Walford, who works closely with hospitality tenants, the gaps are plain to see for anyone how knows the industry.
But he sees the policy as more about creating a broad framework of commercial behaviour, and nudging parties to cooperate and negotiate rather than resorting to rash action.
With the lease forfeiture moratorium measures, which protect tenants from eviction for three months, he points out that there are other ways landlords can act against their tenants, such as serving a statutory demand for payment and petitioning for the company to wound up.
Implicit in the language of the measures is the acknowledgement that new rules of business engagement are required, that parties should work together and try and do the right thing.
“What’s interesting about the government commentary is there’s often an indication of the kind of behaviour they’re trying to achieve”, Walford says.
“There’s an indication that while this isn’t perfect, it’s intended to provide a veneer of breathing space to encourage people to do the right thing. Don’t take action, continue discussions.”
Walford’s partner at Howard Kennedy, Vernon Dennis, agrees, arguing that the crisis signals the end for “financial Darwinism”.
“If you allow the normal rules of self-interest to arise, than the economy will collapse a lot quicker than it perhaps already is doing”, Dennis says.
“It means there is huge encouragement on business to keep paying wages. If there’s a liability with landlord, talk to them.
“We’ve seen lots of government messages urging businesses to try and keep going, offering support with grants, loans and tax deferments.
“There’s a lot of attempting to persuade UK Plc to carry on – and to incur debt in the process, to be frank.”
Indeed the speed and the scale of the legislation throws up plenty of new questions and knock-on effects for business.
One is whether directors could end up being at risk of trading while insolvent, a real possibility as they take on increasing amount of debt to keep operating.
This concern was address at the weekend, with directors to be protected from laws of trading while insolvent.
In fact, Dennis said insolvency had been “effectively locked down” with courts now deferring winding up petitions until mid-June.
If unprecedented is the word du jour, then deferment is also up there, and it is the key piece of advice from the partners when approaching disputes.
On leases and rent, Walford said while some landlords had been playing hardball, there was a need for tenants to see if from the landlord’s perspective too.
“You can easily take a view that rents are too high, landlords have had it too good for too long, they can afford it so let them take the brunt – but I don’t think that’s necessarily right.
“Is it really realistic for a landlord to agree a rent reduction now, when nobody knows what the future holds? Surely the correct position is that everyone holds their breath, nobody behaves irrationally without speaking first. Then when we have a period of greater stability, everyone regroups and says OK, we know what the landscape post coronavirus looks like, we know the impact it’s had on our business. We can now have a sensible conversation about what the commercial arrangement is going forward.
“To ask anyone to commit when the situation is so fast moving is an unrealistic expectation.
“It’s only going to work if people meaningfully engage. Both parties most recognise it’s not the fault of either party. Both parties have pressure of their own which are equally legitimate in being addressed. There needs to be a real effort to find a workable arrangement for both parties.”
This goes for banks too, who must lean in and do their part, and avoid asking for unreasonable personal guarantees on the loan scheme, Walford says.
With the hospitality industry and other parts of the UK economy effectively on ice during the lockdown period, the deferment will inevitably cause “untold problems” when recovering begins in earnest, not least due to the sheer amount of debt.
“UK plc in government and in business will come out of this hugely indebted, and that will have to be dealt with,” Dennis says.
“But until there’s a time when the economy starts moving and the recovery phase starts, the restructuring plans for dealing with that debt are irrelevant.
“At the moment its about deferring that debt, incurring debt, to keep some semblance of retention, so you have a business and staff ready to start trading gaian
“Undoubtedly the debt pile that will be created will create unprecedented difficulties for businesses.”
Walford agrees, saying during the period of recovery, “the sickness won’t be cured immediately”.
“This need for constant dialogues, commercial negotiations, and working together, is going to need to continue for a considerable period of time after we come out of this.
“Unless everyone is playing in a very altruistic fashion, there will be a need for restructuring, and difficult process taking place.”
Howard Kennedy: Rules of ‘financial Darwinism’ no longer apply
Unprecedented is a word that’s been used so much in the past few weeks it’s lost of much its intended impact. Yet it’s a reasonable claim from Chancellor Rishi Sunak that the package of emergency measures he has introduced are indeed without precedent, not only for a Conservative government, but from any government in history. Inevitably though, with reactive, emergency legislation, there is plenty of detail that still needs to be fleshed out. For Howard Kennedy partners Adam Walford and Vernon Dennis, the measures show that the normal rules of self-interest in business no longer apply, with parties being encourged to cooperate and negotiate, rather than resort to rash action.