2020/NO.40 - We have entered unprecedented times. Uncertainty as to how long the pandemic will last. It could be up to two years depending on vaccine success. Equally the difficulty of maintaining a semblance of profitability. That then links to paying rent and the inevitable sadness that when Government support finally ends there will be significant casualties in the hospitality trade, particularly urban pubs. So what happens when the POBs find that rent income is being compromised? What will they do to “maintain shareholder value” as is the current mantra? Take a lesson from the not too distant past from for example Punch Taverns and Admiral.
We were directly involved in the period 2013-2018, always on behalf of tenants. All said and done in terms of the long history of the pub trade this is only yesterday but indeed a different era. Punch, as it then was, rarely if ever went for a change of use on high-value residential locations. Almost all of the pubs concerned were (and indeed still are) in London. The actively followed and successful policy was to quietly sell the freehold interest to a developer whilst the pub was still occupied by the supply tied tenant. The tenant only learned of the sale after completion. There seemed to be quite a number of developers registered in the Isle of Man for no particular reason. Curious.
One such example was the Star, St John’s Wood Terrace, St John’s Wood. It followed a familiar pattern. (Article - The Dark Arts of Property Development) The developer quietly purchased from Punch and instantly released the supply tie by a single binding letter of confirmation (eat your heart out PCA and all that goes for MRO!). A second letter confirms a massive proposed rent hike and this is then linked with a punitive dilapidations schedule. We were involved to try to bring sanity to the rent issue. Costs pile up and things got nasty and very protracted. Central London lawyers became involved on both sides and on it went. The developer makes a “generous” offer to buy the tenant out of their lease and in the case of the Star, Mary McGuire accepted and went. Others like the Gunners, Blackstock Road, Highbury resisted and stayed put. We did a deal on rent and they are still up and running. Many more were not so resolute.
Could this past scenario return and with the same general tactics? We think highly likely due to some of the remarks made by senior POB people in the face of the sad certainty of non-payment of rent in some supply tied urban pubs. For sure the rules on obtaining a change of use have tightened significantly and are much more sensitive than they have been in the past. But this does not change the initial tactics of the POB to quietly sell off to a developer. Then the heavyweight financial leverage on the tied tenant through a huge proposed rent hike and a dilapidation claim. Sadly the pressure is massive when linked to the payment of back rent. More than likely if there is a rent debt it might even be passed on to the new owner to enforce.
All of course perfectly legal and above board but oh so underhand in dealing with their “business partner” in these difficult times. The key is the resistance of the two prongs of leverage…that of the unjustified rent hike and the counter to a dilapidations claim. We will be dealing with the latter in a soon to be issued advice note.