COVID-19 – has the relationship between commercial occupiers and landlords changed for good?
Huw Jones reflects on how the pandemic has accelerated a significant step-change in the tenant-landlord relationship.
COVID-19 has shone a light on how we, as individuals and businesses, interact and support one another. In any relationship, whether business or personal, mutual respect, integrity, and fairness are fundamental to shared success. The landlord-tenant relationship is no different.
The impact of the pandemic on landlord-tenant relationships
The past few months have put enormous strain on businesses, who have been forced to face serious questions about the future. One of the biggest issues relates to offices and commercial premises, which can involve significant cost with a long term commitment. The impact has been particularly felt by start-ups, the hospitality industry and the retail sector. Operational difficulties can be compounded by onerous lease terms or inflexible landlords.
The Howard Group is founded on guiding principles which include loyalty, honesty and forward thinking. We realised some time ago, even before the pandemic, that addressing the traditional adversarial landlord-tenant relationship was well overdue.
Start-ups and early stage ventures
Landlords now have to be much more agile in their assessment of what a good covenant looks like, especially for newer, more innovative companies.
Landlords working with early stage businesses that haven’t built up a financial track record have to think more like a private equity fund. At Howard Group, we take a similar approach to a venture capitalist; we look at the track record, meet with the management team and assess the future potential of the company, rather than just looking at past performance which in a pre-revenue business will simply point to a cash burn.. The landlord needs to be forward looking, understanding the underlying strategy, rather than simply looking at a balance sheet or historical income statement.
Companies that have raised private equity, will typically have funds for an 18 month to two-year period, after which they’ll need to raise more money based on hitting milestones. So, what happens if the tenant doesn’t hit those milestones? As a landlord, a ten-year lease agreement with a five-year break will place a big burden on a business that only has two years’ funding. In that period, if the milestones aren’t hit, the business will need to pivot into something slightly different. It will need to work alongside the landlord to ensure that the business needs are met. Alternatively, the business may be a roaring success and may need more space - a landlord then needs to be as agile and flexible as the business it’s working with.
It works both ways
We are looking for tenants who are willing to work in partnership, and share information and objectives, rather than see the landlord as the enemy.
A minority of businesses may see this open sharing of information with a landlord as an intrusion, especially if they have the more traditional view of a purely transactional landlord-tenant dynamic. This is a much less constructive way of working as it encourages both parties to take entrenched positions .
For tenants and landlords alike, a more open dialogue can reap rewards. Our partnership approach with tenants has certainly made a difference during lockdown and given us a clearer view of their challenges. Being acquainted with their products and services and understanding their cash flow and customer base has been absolutely critical.
Critically it has enabled us to avoid surprises, such as a tenant suddenly not paying the rent because they’ve run out of cash. We do not want to get involved in a sudden dispute which fundamentally threatens the viability of the business.
Especially during the last six months, we have made a real effort to understand our customers’ businesses better and the problems they have faced during these tough times. We have had constructive conversations with badly affected businesses about their expectations over the next twelve months and the impacts over the short, medium and long term. As a result we are able to make viable plans together to ensure the continuity of the business.
This helps our business as a property owner. As a landlord, it pays to try and understand the customer’s business, its industry and cash flow profile. There’s nothing worse as a landlord than having an empty building in a downturn We want to have a great relationship with an ongoing tenant through the good times and the bad.
The future of landlord-tenant relationships
We are keen on having a collaborative relationship with the people who make up the business and understanding the enterprise as an entity, rather than just looking at the historical numbers.
We need to build upon the partnership - arrangements with tenants as we begin to come out of the pandemic, and continue to keep in touch regularly.
I feel very positive about the Cambridge ecosystem generally. Cambridge has shown its resilience through the pandemic and it will continue to be a global centre for high growth knowledge-intensive businesses in the future.
We can anticipate these future needs with open discussions. When tenants need to grow, we can find space for them within our versatile property portfolio and support them as they scale-up.
By working together, we can be on the front foot, anticipate issues before they become problems and build on the beneficial relationships formed during difficult times. It adds up to a positive future for landlord tenant partnerships.