Emerging Trends in the Retail and Hospitality Occupancy Market

Morton Fraser Senior Associate Bess Innes
Bess Innes
Senior Associate
23 April 2021

The impact of Covid-19 has been felt across the commercial property sector; nowhere more acutely, perhaps, than in "bricks and mortar" retail and hospitality.

Even pre-pandemic, the high street was being forced to adapt to the growth of eCommerce. But consecutive lockdowns have expedited the shift; for some, that change will be irreversible.

Data relating to the effects of the lockdowns and the pandemic is everywhere. Last month, research from PwC and the Local Data Company reported 17,532 chain store closures in 2020; that is 48 permanent closures per day. And according to the Office of National Statistics, retail sales volumes dropped 1.9% in 2020 compared to the previous year, representing the largest annual fall on record.

Hospitality didn't fare much better, with licensed premises (many of which have remained closed throughout the pandemic) particularly badly hit.

Up until now, many businesses have been propped up by the Government's range of support packages - the furlough scheme, CBILS, BBLS, business rates relaxations and VAT deferrals to name a few - but as support begins to taper (and at some point the moratorium on irritancy will be lifted (currently due to happen on September 30, 2021)) we have a look at the emerging trends; and what the "next normal" might look like.

Bilateral Agreements

Perhaps encouraged by the Government's recently launched "best practice" Code, some retail (and to a lesser extent, hospitality) landlords have accepted a need to "share the pain" with their tenants. We've seen a swathe of - generally "light touch" - lease restructures over the last 12 months, often involving short term rent concessions (rent free periods, rent deferrals; or changes to payment structures) in exchange for longer term lease commitments.

Turnover (or performance based) rents - a growing trend pre-pandemic - are also becoming more commonplace. In the retail sector, there has been an increase in new - typically short term - offerings being granted on pure turnover basis; though the traditional "turnover top up" model (where a minimum base rent is supplemented by a turnover "top up") is still the preferred model amongst landlords.

For occupiers, the turnover model represents a clear benefit in that what they pay directly correlates to sales. For landlords, it's more likely to be accepted as the lesser of two evils (an occupied unit - even on little to no rent - is better than an empty one) though, for those who can make it work, there is potential for long term rewards as businesses return to "normal" trading and lost income is recouped.

CVAs and Restructuring Plans

For those occupiers who are unable (or unwilling) to reach bilateral agreements, and who can afford to use them, CVAs and Restructuring Plans can offer an alternative mechanism to restructure and reduce overheads.

The CVA, an established restructuring tool, has long been used by occupiers - typically those with large, UK wide portfolios - to implement a restructuring "solution" outside of an alternative formal insolvency regime (most usually administration). Within the aforementioned category of occupiers, CVAs were widely used in 2020, but we may be beginning to see them fall out of fashion - perhaps due to the perception that they are being utilised for sole purpose of compromising lease liabilities, particularly in the retail and casual dining sectors (think New Look, Pizza Express etc). Increased landlord activism in a struggling market has seen a rise in CVA challenges (recent examples being those to the Regis and New Look CVAs).

And this is where the introduction in summer 2020 of the new Restructuring Plan is interesting. At first glance, CVAs and Restructuring Plans have much in common, but there are two key differences that are important in this context. Firstly, the Restructuring Plan involves the Court to a greater extent than a CVA (and, importantly, that involvement is from the "get go"). The requirement for a court sanction early in the process should mean that most (if not all) creditor challenges are flushed out before the Plan is approved. CVAs do not involve any such court sanction and so it could be argued that the court's involvement gives Restructuring Plans a certain veneer of credibility that CVAs lack.

The other key feature is the so called “cross class cram down”. The division of creditors into classes in Restructuring Plans means that a Plan can be imposed on dissenting creditors provided that (a) at least one other class approves the Plan; (b) the dissenting class(es) are no worse off than in the "relevant alternative" (typically administration or liquidation); and (c) the court considers the plan to be fair.

Both of these elements (the court sanction and the cross class cram down) bring with them an element of certainty which has been lacking in CVAs. Whether the Restructuring Plan will replace the CVA as the "tool of choice" amongst distressed occupiers remains to be seen but, if the heavily publicised Virgin Active case (a case which attempts to "cram down" landlords) - which is due to return to the court for the final "sanction hearing" next week - swings in Virgin Active's favour, it's broadly considered that, for certain asset classes at least, it will. 

As with CVAs, though - the up-front cost of Restructuring Plans is likely to put them out of reach for many.

It is important to point out, amid the doom and gloom, that there may still be positives in all of this.

As we shift to more "blended" working patterns, and UK cities experience outward migration, there is talk of an increase in “town square” mixed-use developments with office, food and drink, retail and residential all sharing one space. My local neighbourhood in the south side of Glasgow has come to life over the last 6-12 months, with new "pop ups" and takeaway offerings - boosted by Government schemes and (for them at least) advantageous market conditions - on every street corner.

And, of course, there is online - that "trend" we've been talking about since the late 1990s, but which has had such a boost over the last 12 months. This move will carry with it an increased need for more warehouses, call and distribution centres (and the people and technologies to run them).

But for most of the sector, the future remains murky. And with judgement day fast approaching, those without the ways or means to restructure surely face dark times ahead.


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