Coronavirus: Commercial rent relief and furloughed space grants

A proposed furloughed space grant scheme is the subject of an upcoming oral question on 15 June 2020:

Lord Allen of Kensington (Labour) is due to ask the Government “what assessment they have made of the proposals by the British Retail Consortium and the British Property Federation for a furloughed space grant scheme during the Covid-19 pandemic”.

This blog provides information about the subject to assist Members in preparing for the question. 

Furloughed space grant scheme

On 17 April and 4 May 2020, representatives of retailers and commercial property owners wrote to the Chancellor of the Exchequer proposing a “furloughed space grant scheme”. The letters, and a background briefing, are not available online but the British Retail Consortium provided them to the Library at the Library’s request.

Under the proposal, the state would cover the fixed property costs—rent and service charges—of businesses in the retail, hospitality and leisure sectors that have had to close their physical premises, or which have suffered “dramatic falls in turnover”. The letters drew a parallel with the support already offered for furloughed staff through the coronavirus job retention scheme (CJRS). They argued that “it would be perverse for Government to spend a large sum of money supporting the pay of workers who have been furloughed through no fault of their own, but to not do the same to support the furloughed space in which they work”.

Position of the retail sector

The letters were written jointly by the British Retail Consortium (BRC), the British Property Federation (BPF) and Revo, which represents the retail property sector. The organisations welcomed the existing government support for the industries, including the CJRS, the one-year business rates holiday and the various business loan schemes. However, they said that retail firms were often unable to access loans, because lenders are reluctant to lend to the sector. In addition, they estimated that two-thirds of fixed property costs—which, they said, were often the largest element of business costs after payroll—would still need to be paid.

As a result, the organisations argued, “ongoing payment of property costs will imminently become impossible”, with the result that “unless further action is taken, we will see many otherwise viable companies file for administration”. They added that “supporting staff who have been furloughed will be of limited benefit if at the end of the lockdown period the businesses for which they work have ceased to trade”. They also stated that the situation was urgent, with “survival […] now being measured in weeks rather than years”.

Proposals

The BRC, BPF and Revo proposed a time-limited scheme whereby retail, hospitality and leisure businesses could apply for a grant to cover some of their fixed property costs. In the 17 April letter, they suggested the Government should offer payments at the following levels:

  • 25% of fixed property costs for a drop in turnover of 40% to 60%;
  • 50% for a drop of 60% to 80%;
  • 80% for a drop of 80% to 99%; and
  • 100% if a business is not trading at all.

They also suggested expanding the scheme to serviced offices and student accommodation where, they said, “evidence of similar stresses is now emerging”. The authors recognised that the structure above was only one possibility, saying that “variations […] could be built in”. In a briefing note, the same organisations outlined an alternative option. In this, government grants would be equivalent to a firm’s fixed property costs, reduced according to the business’s drop in sales, then reduced by a further 30%.

The letters did not include any estimates of the potential financial costs and benefits of the scheme.

Government response

Any response to the letters has not been made public. The Telegraph has reported that the Government was seriously considering the proposals, and was in “detailed talks” with industry leaders. When asked about the proposal in a written question, the Government referred to the support and loans already made available to businesses. It also mentioned other measures in relation to commercial rents in the pandemic. For example, the Government:

Overseas schemes

The background briefing for the letters drew attention to similar schemes operating in Denmark and “other European countries”. For example:

  • In Denmark, the Government will pay compensation to businesses depending on their loss of revenue. Businesses forced to close will receive 100% of their fixed costs. The BRC, BPF and Revo said that the scheme had been approved by the European Commission under article 107 2(b) of the Treaty on the Functioning of the European Union, which relates to state aid for businesses.
  • In Sweden, landlords who reduce fixed rents for tenants in vulnerable sectors can apply for state aid to compensate for up to half of the reduction in rent.

Commentary

Victoria Hills of law firm Freshfields Bruckhaus Deringer noted the comparisons with the Danish scheme. She said there had been “stringent requirements” on Denmark to show that their scheme would meet the state aid rules, taking into account the temporary flexibilities introduced by the EU to deal with the impact of coronavirus. These rules continue to apply to the UK during the transition period. Ms Hills suggested, for example, that, under the temporary framework, any UK scheme might need to be capped at €800,000 per firm. She also described other areas that would need clarification, such as:

  • whether payments would be made to the landlord or the renter;
  • the duration of the scheme;
  • any limits, such as a turnover cap on qualification; and
  • whether the Government would accept an approach which differentiated between sectors, having thus far resisted it in other areas of its support package.

The Hospitality Union, which represents business owners in the hospitality sector, put forward an alternative proposal for a nine-month national rent holiday. Under this suggestion, all rent payments, debt and interest payments for hospitality and leisure businesses would be postponed and added to the end of the lease.

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Image by Gary Butterfield from Unsplash.