“If we don’t change the way we do things as an industry, the next three months are going to be really difficult for us.”
That was the stark warning from Jonathan Downey to attendees at MCA’s virtual event, The Conversation.
He said the industry had inevitably been in reactive mode towards the crisis, but that that needed to change now: “We need to think ahead, we need to plan ahead and then we need to press ahead with the requests for next measures.”
Having achieved Government support for the industry in the form of loans, grants, the jobs retention scheme and the lease forfeiture moratorium, Downey said that in the next few weeks the industry needed to embark on ’phase two’.
While he acknolweged a majority of landlords were respecting the lease forfeiture moratorium, he said the next phase would include a debt enforcement moratorium.
“It’s clear that this is coming”, he said. “It will help landlords, which should prompt another three month extension of the forfeiture moratorium.
”I’m hoping for a 1 April-1 September six-month national armistice. A complete ceasefire, when there is no litigation, no claims by creditors and no action taken by anyone against anything in relation to any debt, at any time.”
Lobbying for to remove of the £51k rateable value threshold, ensuring rateable value grants are proportionate to business value, asking for a nine-month rent holiday starting from 1 April, and the so-called ’Operation Earthquake’ are among Downey’s next priorties.
“This is based on an insurance solution that happened in New Zealand following an earthquake there,” he explained. “Nobody was ensured for earthquake damage, and so the Government became an insurer of last resort.”
“These are just the measures that I’m talking about,” he added. “I think there needs to be more people feeding in ideas, initiatives next steps and so on. And there needs to be a better system, and more effective forum for making those points heard.”
Downey went on to answer a series of questions from operator directors…
Q: Can tronc be included in the furlough scheme?
JD: Tronc should be included because it goes through PAYE. The reason the Government set up the JRS using HMRC is to avoid abuse. The reason they created that cut-off date of 28 February is to avoid abuse, it’s all about avoiding abuse. If you’ve got chefs who are on 50% pay and 50% tronc, then that tronc must without a doubt be included.
When the guidance came out it mentioned fees, commission and bonuses but not tronc, and there has been some revised guidance that mentions tips but not tronc. In my business, for everyone we put on furlough we included tronc and put it all through as one line under PAYE. There are practical ways of dealing with these things and I think in this situation we need to respect these grey areas and just leave them as grey areas.
Q: What advice would you give to operators having to deal with landlords insisting on 50% rent, or that have deferred the amount with no rent-free period?
JD: We’re kicking that can down the road and we’re going to kick it further to the end of September. It is clear Government policy that nobody should be paying rent at the moment, and this debt enforcement moratorium, which will stop landlords pursuing aggressive measures, will be law within the next few weeks.
My advice is hold out, stand your ground and don’t give in, but of course every case is unique so you will have to include some of your own judgement there. Personally, I’m holding out.
Q: How can operators help to get the rateable value information together, or in a consolidated form?
JD: I’ve been really disappointed in the support from the industry professionals around us but there must be somebody in the property sector who can figure this out. The rateable value is straightforward for most premises and local authorities must have this information. Somebody with the right experience and connections needs to work it out and tell us so we can put a figure to Government.
Q: Do you agree that with sales returning at say 50% like-for-like, that the only rent model that will work from June onwards will be a flexible model? And how will we get landlords to agree to this?
JD: I absolutely agree. If we get this national rent-free period for nine months, then it’s all about what happens in 2021 and turnover rents has to be the way forward. I don’t know how as an industry we can force that through, and if anyone has any ideas on that I’d love to hear them, but it seems that it will have to be on a case by case or landlord by landlord basis, and it’s going to take a huge shift in approach by landlords.
When it comes to estates like Canary wharf, certain parts of the West End and Spinningfields in Manchester, a concerted effort by operators will be really important. In the past there has been a tendency to go it alone, but now everyone needs to just get together and say, ‘we’re not accepting anything other than turnover rents.’
Q: Will the debt enforcement moratorium apply to landlords as well?
JD: Yes, definitely. The whole raison d’être of the debt enforcement moratorium is to protect landlords from credit suppression, so that their banks and other lenders can’t enforce their security over premises they’re no longer getting any rent from. We need to help landlords, so that they back off. We need to give landlords a similar kind of protection that we’ve received.
Q: Can you give us a bit of insight into how your skills, influence and profile contrasts and compliments Kate Nicholls at UKH, and how you work together?
JD: I think that Kate is absolutely brilliant with the detail and at handling the conversations that need to be had with central government. But, and I could be wrong in this, I get the sense that she might not have a lot of support. I apologise if that isn’t the case, but I shouldn’t have had such a role to play in the last few weeks, I’m just one small business operator.
The fact that I did have such a key role to play is a real worry to me because I shouldn’t be in that position, and there are a lot bigger businesses and hopefully a lot bigger brains in our industry than mine, that should be influencing these policies and deciding next measures that work for everybody.
Another concern I have is that there’s too much self interest and, to some extent, conflicted interest. There are not enough people with an objective view of what’s best for most, or for everyone. We need to understand that everyone’s going to have to share some of this pain, but nobody should share it more than others.
When Kate and I are on the same page it’s very effective. The hours she puts in and the focus on detail is something extraordinary that I just couldn’t do. I think she needs far more senior level support from industry operators, CEOs, MDs, who can look forward and think about what they’re going to need six or nine months from now and create a series of next measures that are essential for the continued operation of 70%-80% of businesses in our industry.
Q: Do you think there is any likelihood that HMRC will write off VAT arrears?
JD: I don’t think so. One of the phase three workout measures that we should be asking for instead is a reduction in VAT. In 2008, the Government dropped VAT for a while to 10% and that could be one of the measures we get.
The big thing for Government is that they need to know that the right amount of money is going to the right businesses in the right proportion. And that there is limited, or zero scope for abuse. That’s why Operation Earthquake ticks the most boxes there, although it is probably the most complicated to make happen. The Government will want to support good businesses, i.e. those that pay their VAT on time, and it would be potentially counterintuitive for them to support businesses who have some VAT arrears.
Q: Should we agree to paying service charge during the closure period?
JD: No. The forfeiture moratorium is a moratorium against enforcing any payments under the lease. That includes rent, service charge, insurance, marketing contributions and so on. I would say hold out on everything. We need to hold on to our cash and we have no idea how long this is going to go on for. We’re not even in a position yet to pay our suppliers so landlords are at the back of the queue for me.
Q: As the furlough scheme is only for three months, do you think it’s likely that this will be extended if we enter a slow, sporadic undoing of lockdown?
JD: This is a really important point. And I don’t think it’s one the Government has even thought about yet, but I know that Kate is on them and will get the message through to them. I think a couple of things could happen. One this that they could do a 40% furlough, which will work for some staff, and everyone else will go back to work, enabling operators to open on a reduced level basis.
There has got to be some kind of evolution of the JRS that will enable us to get back to business without losing loads of money from the moment we open again.
If we’re in lockdown until the end of May and then allowed to open in June, July, August before another lockdown, and JRS stops, we’re all going to be losing money. So, in some respects it might be better for the lockdown to continue until the end of June with all this Government support in place so we can re-emerge completely open.
Q: What would you think to setting up a forum and getting some senior property lawyers and landlords around the table to create a new simple lease bolt-on to enable the flexible rent model we need?
JD: That’s a brilliant idea and somebody should do it. I’m surprised a law firm or property agent isn’t already working on that. A lot of businesses rely on hospitality, where are they and why aren’t they helping us?
Q: What do you think are the safest grounds for objecting to the statutory demands so that the court agrees to serve an injunction?
JD: I don’t think there are any. It’s just a question of whether the debt is due, and it is, it doesn’t go away. The forfeiture moratorium just protects the changing of the locks, so if you have a landlord that’s going that way then there’s not a lot you can do until the debt enforcement moratorium appears.
Quiet Enjoyment [a covenant that promises that the grantee or tenant of an estate in real property will be able to possess the premises in peace, without disturbance by hostile claimants] and Frustration [principle which allows one party to terminate an agreement in circumstances when some unforeseen event occurs] are two things that have been mentioned as options, but Quiet Enjoyment has been rejected as an option by a couple of specialist barristers that I’ve spoke to, and Frustration doesn’t really solve things unless you want to walk away from a site.
Q: If an operator has a handful of people doing one- or two-days worth of work in the next couple of weeks dealing with HR documents or finance reconciliations, can it put them on furloughed?
JD: A real problem with the furlough scheme is that part-time employees are lost in the middle. I think the best thing to do is rather than having two people doing half a job each, furlough somebody and get the other to do all the tasks, and then rotate them out every three weeks as you’re allowed to under the scheme. There’s no real ideal way around that. I suppose people in the industry could swap and share employees, there are things like that you can do.
Q: Do you think the Government are starting to realise what a force for common good Britain’s diverse and devolved hospitality sector is?
JD: I think they’re starting to realise a lot more than they did. That’s been a result of not only the lobbying and incredible efforts of people like Kate but also as a reaction to what happened in Ireland. When it came out that 85% of those 140,000 Irish job losses were in hospitality, everyone began to realise how fragile and important everything was.
We’ve got to make the most of this and there must be some long-term benefit from it once we all emerge from hibernation. I hope we’ll end up with a stronger, louder and more united voice. That comes down to Kate having the right kind of support, and more of the senior CEOs being prepared to share and swap ideas and initiatives. We will all benefit if that happens.
This edition of The Conversation is the second in a new series of virtual events hosted by MCA, an invitation only event for leaders of the major chains made possible through the sponsorship support of Nestle Professional, Pernod Ricard and Red Bull.
The Conversation: with Street Feast CEO Jonathan Downey
In the latest edition of MCA’s new virtual event, The Conversation, Street Feast CEO Jonathan Downey discusses the impact of coronavirus on the hospitality sector, what’s been achieved so far, and what should be next on the agenda. The former corporate lawyer, who has worked with UK Hospitality on winning concessions from government, answers a series of questions from operator directors about pressing issues facing as the sector adjusts to lockdown. He urges leaders to shake up the way they do things, and plan more strategically for the future, despite the uncertainty created by the crisis.