Rent has emerged as one of the central and most polarising issues during the coronavirus crisis, creating an us versus them dynamic as operators look to drastically cut costs and wind down their businesses.
In the pub sector, the issue has been brought much closer to home, with many pubcos acting as de facto landlords to their smaller self-employed tenants.
Few pub CEOs have been willing to speak publicly on the issue, but have been coming under increasing pressure from a small but noisy group of activist tenant groups.
This pressure has been compounded by the likes of Fuller’s, Young’s and Admiral coming out and offering tenants a month rent-free.
With questions being asked of the major groups, a letter was drafted with the British Beer and Association, outlining their position – effectively arguing that the government had provided grants specifically to cover fixed costs such as rent.
For one corporate advisor, the letter was eye opening for its boldness in attempting to shift the terms of the debate.
“It’s quite a punchy letter,” the advisor told MCA. “I thought, whoever’s written that is really putting their head above the parapet. What they’re saying is, you’ve had the government help, you can pay your rent. That’s the position of the landlord they’re taking.”
Another commentator, who also asked not to be named due to the sensitivity of the issue, told MCA of his surprise that the trade body had nailed its colours to this particular mast.
“The BBPA are in a dangerous position at the moment, taking that view,” he said.
“What they’ve shown, is they’re now an organisation not for pub operators but for tenanted pub owners, i.e. property companies.
“The problem for the BBPA is only one trade association has access to government, and that’s UKH. These guys have been frozen out basically.”
Politics aside, while the BBPA letter sets out a collective position for the pubcos, one former tenanted director puts the dilemma in financial terms.
The rent roll for a pubco is on average £3m a month for every 1000 pubs, he said, meaning Admiral’s cancellation could equate to a £2m write-off.
The former insider told MCA: “What they’re trying to avoid is committing to four weeks rent free, and then if lockdown is extended, having to extend that to another four weeks. It’s a difficult one for both parties.”
The corporate advisor agreed, saying even if help was available to tenants on a case by case basis, pub companies cannot be seen to be offering blanket rent cancellations.
“As soon as you do it for one, you have to do it for everyone,” he said.
“Some tenants are getting deals, where it’s a private landlord, and there’s no far-reaching implications.
“But if it’s a corporate landlord, if you give it one, you effectively give it to all.”
Rent holidays are fine in practice, he said, and simply defer and extend the term.
The problem for the tenants will be that even when they reopen, trade is highly unlikely to immediately revert back to how it was before, raising the prospect of turnover rents in future.
“As soon as they start to open again, it’s not necessarily true that they’re going to be able to cover their rent”, the advisor said. “If you’re just delaying it, it seems that the economics don’t quite stack up.
“Then there’s the preopening costs – the training, health and safety, restocking, cleaning. You need a huge cash cheque even before you open the doors.”
The commentator said the position of pub companies on the issue went back the financial structure of the business, and how leveraged it is.
“They’re not cuddly old family brewers like they used to be”, he said.
“If you’re a property compnay, because of their financial position, they might be overleveraged as a company, and they might face going out of business themselves.
“It’s a complicated stress issue. You can focus on your own position, buy we need clearer quicker support from banks on what the positions is, so people don’t have to make what are seen as these tough, hard, callous positions.”
The former insider said no pub boss wants to see a tenant go out of business, but acknowledged this was likely in the current context.
“It’s a fine balance”, he added. “Ultimately, with every business, whether it’s a pubco or high street casual dining chain, if the landlord isn’t helping, or the bank isn’t helping, it’s a fine balance of who survives and who goes pop.
“They don’t want them to fail. It’s not a good thing for pubcos. You lose good people.
“But by not giving blanket rent free periods, there probably will be some failures.”
Rent cancellations: ‘As soon as you do it for one, you have to do it for everyone’
Rent has emerged as one of the central and most polarising issues during the coronavirus crisis, creating an us versus them dynamic as operators look to drastically cut costs and wind down their businesses. In the pub sector, the issue has been brought much closer to home, with many pubcos acting as landlords to their smaller self-employed tenants. Few pub CEOs have been willing to speak publicly on the issue, but the major groups have been coming under increasing pressure from a small but noisy group of activist tenant groups. This pressure has been compounded by the likes of Fuller’s, Young’s and Admiral coming out and offering tenants a month rent-free.