2020/NO.28 - Beyond doubt, we are all entering a period of trade that has no precedent. We just do not know how trade will return nor the extent to which “indoors trading” after the summer period will genuinely work with social distancing taken into account. We then have the spectre of how rent should be calculated to take account of a venture into the unknown. For those who have no rent review on the horizon, there are two options…
- (a) you can hope that if you are still supply tied that your POB will be benevolent and help you to survive by the many options available or;
- (b) if you are free of tie, and we hate to think this, you will be left to sink or swim with probably zero help and assistance. Look at it this way if the FOT new arrangements do fail due to accumulated rent debt, then the POB gets the property back and can push the trading operation out on (yes, you guessed it) a new supply tied lease.
BUT if you are either waiting for a rent review or a new lease how do you set the new rent as being fair in the open market to both landlord and tenant. Not to forget that the rent review understandings must reflect both a willing landlord and a willing tenant. We think the fairest and most reasonable outcome is a rent based on turnover set for say the next two years. Then there would be a further review to reflect years three to five which could either be on a turnover basis again or to ‘Open Market Value’. The point being that it would remove the guesswork of trying to forecast the level of Fair Maintainable Trade (FMT) that forms the bedrock of the profits test calculation. This then links to the vital element of the RICS Guidelines which is the required reliance on Fair Maintainable Operating Profit. The two go together and require a guess at ongoing or future FMT. If you set the estimate of FMT too high then the tenant will just not survive. Too low and the landlord is not in receipt of a fair rent.
So take away the guesswork and link rents in the short term to turnover and reflect the reality of what can be achieved. We cannot say at the present time how social distancing will impact on future trade. For that matter neither can your POB. It will take a good six months for things to level out, assuming there is no second spike in COVID-19 positive tests. But there is no harm in trying to see if the POB representatives will also see the fairness of our line of thinking. That way both can hopefully survive this terrible pandemic.