Watch This (Furloughed) Space

Watch This (Furloughed) Space

This article was published on: 4th June 2020

The current lockdown has brought with it a raft of swiftly introduced legislation designed to provide commercial tenants with a degree of protection from enforcement action by their landlords.  The legislation is wide ranging and has brought with it well publicised changes to the forfeiture and possession claim regimes.  Further restrictions on winding up petitions are expected to follow in the form of the Corporate Insolvency and Governance Bill 2020.

However, whereas these protections undoubtedly provide breathing space for tenants, it might be argued that all they achieve is a suspension of inevitable disputes.  A tenant is still obliged to comply with its contractual obligation to pay rent and (as we have reported) many commentators fear an avalanche of litigation is on the horizon, where landlords and tenants are unable to agree some alternative form of commercial resolution or rent suspension.

What, then, could the Government do to try to balance the interests of property owners and occupiers when this scenario begins to bite from July onwards?  A simple extension of the relevant period will not address the core issues: many tenants will remain unable to pay their rent and other sums due and landlords will face increasing arrears with mounting costs.

One proposal which has received a limited amount of publicity to date is generally referred to as the Furloughed Space Grant Scheme (FSGS).

What is the FSGS?
The FSGS was originally proposed in a letter by industry bodies (BPF, BRC and Revo) in April 2020.  It would establish a means of tax-funded financial support for businesses facing difficulties in the form of a sliding scale of grants towards “fixed property costs”.  The proposal suggests:

Payment Conditions
100% payment of fixed property costs Tenant business is not trading
80% of fixed property costs Tenant turnover has decreased by 80% to 100%
50% of fixed property costs Tenant turnover has decreased by 60% to 80%
25% of fixed property costs Tenant turnover has decreased by 40% to 60%

 

Fixed property costs are described as “fixed property costs placed on the business during this period, namely rents and service charges”.  The proposal suggests the FSGS would mirror similar schemes introduced in Denmark (where it is thought to have been introduced with a degree of success) and “other countries”, though limited information is available providing other examples.

Provision would be made for clawback of overpayments, where turnover results are better than those forecast. Forecasts would be self-certified or independently audited by the businesses seeking the grant.

The proposal suggests the scheme be limited to those businesses in the retail, leisure, and hospitality sectors, at least initially, as being those hit hardest by the pandemic. It highlights the “complex ecosystem” of the commercial property industry, and the many stakeholders who stand to be affected if the sector experiences a downturn, all the way up to “the pensions and investments of the public.”

Has the Government Responded?

To date, no official response has been published by the Government.

Revo, one of the bodies representing the retail sector, has confirmed it is in discussions with senior Cabinet Secretaries of State and the Economic Secretary to the Treasury – early indications suggest that the Government “may be open to discussion on the FSGS” if potential costs can be restricted.

What’s Next?

At present, it is a matter of awaiting further updates from the industry and, most importantly, the Government as to whether it will take matters beyond initial discussions and set out firm plans to implement the scheme, or a variation of it.

As ever, the proposals raise as many questions as they provide answers and clarity will be needed on exactly how the scheme will operate, the assistance available and the circumstances in which a right to claim will be triggered.

The one certainty is that the arrears time-bomb will otherwise continue to tick and, at some point, the Government will need to make difficult decisions as to whether it extends the current deadline, introduces new measures or does nothing – if it chooses the latter option, disputes are likely to arise and turbulence may increase across sectors which have already been heavily affected by the lockdown.

If any landlords or tenants require advice on their options, please contact us.

Author: Paul Sagar, Senior Associate

Share this post