Throughout the pandemic the Government has tried to balance the of use interventionist strategies to protect the UK economy with its preferred approach of finding market-based solutions.

Last week's announcements on the latest evolution of the Code of Practice for commercial property relationships is a continuation of this approach, with the Arbitration process due to come into force from 25 March 2022. As always however, no-one is entirely happy nor could they be given the lack of detail around the constitution and operation of the Arbitration process.

Whilst the direction of travel is virtuous, for example the update solidifies various areas of ambiguity around other landlord legal remedies for debt enforcement (such as County & High Court Judgements*), there will be many hospitality operators that are still under pressure.

(*Interestingly there is no mention of as yet untested options such as a creditor's application for Administration or a Court Appointed Receivership)

It has also become apparent that some operators/tenants see the latest missive as a reason to park the issue of rent arrears entirely until next year, using the announcement as an opportunity to improve short term working capital and still hopefully agree later cost reductions.

This is a dangerous strategy to adopt for two reasons:

  1. The Code of Conduct is very clear that tenants that can pay, should pay, and that dialogue should be entered into proactively and in good faith. If this is not done, one can imagine an Arbitrator taking a dim view at a later and more critical stage.
  2. Director's duties were temporarily relaxed under the temporary provisions of the Corporate Insolvency & Governance Act 2020, but were reinstated some time ago which means that Directors have a positive onus to be making reasonable objective assessments about cashflows and viability.

For the hospitality and leisure sector this is particularly acute issue, coming at a time when there are mixed recovery trajectories and substantial inflationary pressures which are a problem for both tenants and landlords.

We therefore strongly recommend:

  1. It may be uncomfortable, but early and continued good faith dialogue between tenants and landlords.
  2. Discussions should be based upon robust financial plans, conservative to allow flex but commercial enough to allow all parties to benefit.
  3. Clear communications with existing capital providers, and in particular lenders to establish available and/or appropriate liquidity.

Although this will sound self-serving, typically such discussions result in better outcomes and longer term relationships when proper situational advice is taken whether this is legal, real estate or restructuring based.