Commercial Rent (Coronavirus) Bill (Second sitting)

Peter Dowd Excerpts

Committee stage
Tuesday 7th December 2021 Public Bill Committees

[Seema Malhotra]

Q I think it is important—in the context of increased business costs next April, whether from business rates or the jobs tax—that your view is that those six months may not be long enough to have the scheme in place.

Martin McTague: We are seeing a lot of retail businesses hanging on by their fingernails, hoping for the best in this last quarter, and trying to get through the Christmas period, which is often make or break for them. If they get even a partial success, and start creeping towards a solution at the end of spring next year, it would be disastrous to try to drive those businesses under when they have survived all the trials and tribulations of covid so far.

Andrew Goodacre: I think the way the code of practice and the Bill have been put together is not bad, and they really try to cover all eventualities. The cost element of arbitration is a barrier to businesses, and puts the legislation at risk. The viability question—how you determine viability, and the clarity and transparency around that—needs to be addressed early on.

I know that we have asked this question and been given the answer, but there needs to be absolute clarity that the Bill applies to all businesses in scope, including those that are contracted out of the Landlord and Tenant Act 1985. That was one of the earlier questions that came back from some members, and we were told that it does include all those contracted-out businesses, but we need to be clear on that, because we do not want to end up with an unnecessarily ambiguous area that leads to legal argument.

There are also tenancy-at-will situations. When negotiations on a new lease are ongoing but have not been resolved during the closure period—the protected period—the tenant is operating on a tenancy at will. Arguably, there is no guarantee that that tenancy at will is covered by the Bill. Again, that will need clarity and understanding.

Martin McTague: There is another point that I should have raised. A lot of supply-chain businesses supply those that are directly affected and covered by the scope of the Bill—they have been seriously affected by what has gone on so far. If you take a retailer, for example, virtually everybody who is supplying that retailer has gone through the same sort of trauma as the retailer, but none of them will be protected in the same way.

Jack Shakespeare: I echo and endorse Martin’s point: one of the prospective risks is the uncertainty around the next few months. It feels like a bit of a “hold your breath” moment. You could talk about it being make or break for our sector and for different characteristics across sectors. A make or break part of the year for the gyms, pools and leisure centres sector is January to March. That is a hugely important quarter of the year, and it rolls into that time period. I would just echo that: the uncertainty of the next few months is a major risk.

[Peter Dowd (Bootle) (Lab)]

Q I want to tease out a little bit more on the extent of the impact on the Landlord and Tenant Act 1954. How wide is it? How many businesses are we talking about?

Andrew Goodacre: Contracted out?

[Peter Dowd]

Yes.

Andrew Goodacre: I would not know the percentages. Over the years, people have come out of it, sometimes incentivised by the landlord because it is preferential for the landlord to have the tenant contracted out. This is not my absolute field of expertise, but there is a wider view that the Landlord and Tenant Act could be rewritten as well in the near future, to reflect a more modern business environment. There are concerns about that Act in general.

On the issue of whether a business is in or not, we are told that everyone is in—it does not matter. The tenancy at will is slightly different. That is where a temporary tenancy agreement is created because the negotiation for a new one has not been completed, but a tenant is given the opportunity to operate at will until such time as a new one is agreed. A tenancy at will gives no protection whatsoever to either party. Either person could walk away at a week’s notice—at very short notice.

[Peter Dowd]

Q Do you think that is a significant lacuna?

Andrew Goodacre: We need to be clear that the Bill is designed, I believe, to protect businesses that were mandated to close in the timeframe of March ’20 to, depending on the sector, August ’21, and it should not matter whether that business is contracted out under the Landlord and Tenant Act—we are told it does not matter—and it should not matter if they have, through circumstances during that timeframe, ended up on a tenancy at will, simply because they could not agree their new tenancy under normal circumstances. Those are the areas where we want to make sure that the legal loopholes do not exist for highly paid lawyers to exploit.

[Peter Dowd]

Q I am sure the Minister is listening to that. I think he has clearly got that tagged.

Andrew Goodacre: I am sure he has. What we have been told is absolutely correct and reassuring. We just want to see it written with absolute clarity.

[Peter Dowd]

I am sure the Minister has got that tagged and will be paying due attention to it.

[The Chair]

I think for today, Mr Dowd, we will just ask the witnesses questions.

[Peter Dowd]

Q Thank you, Chair. In terms of the sectors that you think are most indebted, how are they currently coping? What are those sectors? We have touched on that a bit today. Which are the sectors that are currently most in debt? How are they managing?

Martin McTague: There is a very clear dividing line. The retail, hospitality and leisure sectors are the ones most badly damaged by this whole crisis. It also reflects the point I made earlier. There are extended supply chains within those sectors as well, which have also been affected. In terms of the top of the supply pyramid, retail, hospitality and leisure are without doubt the most affected sectors.

[Peter Dowd]

Q In terms of arbitration and the process available to commercial tenants, what can be done to ensure that they are aware of that process? We have lots of businesses under stress and strain, which we all understand—the Government understand that; we understand that. What do we need to do to get that message out and to give some reassurance?

Martin McTague: You will probably anticipate my first answer, which is that trade bodies are probably a good way of getting the message out. I think lawyers as well. The first thing that most people in this situation will do is to refer to their lawyer. There has to be a clear duty on lawyers to explain that arbitration is an option that they can take up.

In our experience, the smaller businesses tend to respond better to social media, so a BEIS publicity campaign based on social media contacts. The other obvious one is local government, which could do a lot to get this message back to retailers, especially in their area.

Jack Shakespeare: I support that, absolutely. As a trade body, engagement from the Department to us has been very positive. That communication has been great. We have been able to disseminate as much information as we could accurately and efficiently. I would echo that starting point. Again, use local government, lawyers and social media, recognise the characteristics across each sector and work with trade bodies to get the right messages across. They are obviously the experts in talking to those different businesses.

Andrew Goodacre: The communications have been covered well by my colleagues. To go back to your earlier point on what people have done to get through the crisis, we only do retail businesses, and they worked really hard as always. They have shown great creativity and determination, but one telling fact is that their level of debt has increased five times, by taking out bounce back loans, for instance. The larger retailers would have taken out a business interruption loan.

There was some research done in the summer of this year that suggested that the debt in independent businesses —which is not the usual business model; they do not normally do debt—is five times higher. It is estimated at about £2.2 billion. That has to be repaid. Then you have got rental debt on top of that. It leads back to this argument of viability. When you are assessing a business, you take a cold, hard look at its balance sheet. If a small business has a business loan or rental debt on there—and you have to counter the liability—before you know it, it is technically balance-sheet insolvent. It still may be viable as an operation, but there is a technical balance-sheet insolvency because of the level of liability it is are carrying, which it would not normally be carrying.

Whether it is rental or business loan debt, debt is a problem. Businesses have had to do it because they needed to survive. They wanted to trade and give themselves the chance of re-establishing themselves. Many are doing that. If we get a good Christmas, hopefully they can look to ’22 with some positivity.

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Paul Scully)]

Q We talked a bit about the scale of the problem. Government signalled that we were going to legislate in this area. Can you give us an idea of what that did? Did it kick- start conversations? Did you see results that are now priced into the debate between landlords and tenants? Do you have any reflections on that?

Martin McTague: I saw a definite change in the atmosphere. I know the Minister will be aware of this, but I think there was some doubt as to whether you, as a Department, would go this far. Free-market instincts would suggest that you would not. As soon as you had made it clear that compulsory arbitration was going to play a part, the whole atmosphere in these negotiations seemed to change. People entered into much more constructive arrangements. Some of them completely avoided or did not want to go down an arbitration route and settle on payment terms, which I do not think they would have done prior to that decision, so I think it has had a wholly positive impact.

Andrew Goodacre: I would say that when we first started looking at the problem in 2020, it was 40% to 50% that had experienced challenges with trying to negotiate something with landlords. I said earlier that we are down to a hard-core 15%—maybe 20%, but it is probably nearer to 15%. There is entrenchment on both sides at that point. The message about sharing a burden that Jack referred to earlier is really crucial in that. People on both sides, where they are entrenched, realise that they stand the risk of losing something from that position. People are beginning to come to it now.

If I have a concern, it is about things I have been hearing from tenants who are saying that landlords are trying to leverage negotiations before getting to arbitration. I mentioned asking people to give up security, or even saying, “We’ll write off part of that debt, but we’re going to increase your overall rent up to this level.” They are using a bit of power, fear and the realisation that cash is king to the business in order to influence a decision that may not be in the best interests of the business in the longer term, but in the short term looks like a natural solution. Some of that may be right. I am not saying that it is not, but there is an indication of some of those behaviours starting to manifest.

Jack Shakespeare: To endorse that, I think it has changed the atmosphere. It has certainly turbo-charged the conversations. It goes back to a few things. The ability to disseminate the information is really important. You have picked up on the clarity before. How that comes out through trade bodies and goes out through lawyers and local government is really important. That will maintain the pace of conversations. It is really important that it does not drop, so that people access that information. The overriding sense of uncertainty looking ahead is a massive dynamic right now, but holistically it has really changed the atmosphere and advanced the conversations.