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Opinion & Analysis

Commercial landlords hold key as Covid-19 hits retail economy

By Orlando Yeats

Tenants and landlords are at this time navigating one of the most important business economic balancing acts of our time, with the latter holding the key in shaping what the Gibraltar high street will look like in years to come.

Last Thursday’s Viewpoint aired some insightful interviews with important Main Street retailers from big name UK franchises. They highlighted the legitimate issues forced upon them by the Covid crisis, but one issue was flagged as the biggest burden of all, rent.

Commercial rentals in Gibraltar are always been calculated at a premium with most leases in recent times having been set at a time of plenty.

Some in the business fraternity refer to local commercial rents as ‘freak rents’, a hyperinflated calculation that takes into account initial premium payments on assignment, unaffordable to the majority of business investors.

These premiums are normally waived by landlords and instead shared in equal proportion over the duration of the lease, thus setting the ‘freak rent’ market value.

These hyperinflated rental values are then replicated through the commercial rental market as standard, creating almost unreasonable rent levels.

In addition, the upward only trajectory of rents means the tenant really has to nail his business concept with no room for error.

These are high stakes business ventures which often fail due to unrealistic rental expectations from landlords.

Minister Daryanani in his GBC interview interestingly compared the relationship between the landlord and tenant as husband and wife, and in many ways he is correct. Like any good relationship, there needs to be give and take.

But there is one difference. In the marital relationship a spouse, as long as they have been a good partner, acquires rights and has legal protection, whereas a tenant can be hung out to dry through the terms of their lease, with a messy one-sided divorce ensuing.

Tenants right now find themselves in an unsustainable position with most businesses reporting losses of up to 80% year on year.

We have seen major local entities in tourism and gaming sectors announce consultation periods which will unfortunately lead to redundancies.

The rumour mill is saying that in the first week in July when government BEAT employee protection ended, the Employment Agency received the most Termination of Employment requests since records began, an extremely worrying development if true.

It is widely accepted that the BEAT 1.0 and 2.0 measures have created a sensible framework aimed at protecting business tenants and provided respite and support as Gibraltar comes to terms with the economic reality of Covid.

Government incentivising landlords to defer or charge half rents during Quarter 2 was a great help to tenants and further help in Quarter 3 with 50% discounts for government tenants and 25% off private rentals has also served to assist businesses greatly.

But as the months roll on and with Government seemingly keen on weaning the business community off the support system, it’s time for landlords to step up and assist loyal tenants with further rent relief.

Until we navigate out of the Covid crisis, landlords need to adjust their expectations as we move into a new economic reality.

There is some recourse for tenants with unsympathetic landlords.

The Insolvency (Amendment) Act 2020 which was passed on 29th May has served to create a number of protective measures to shield tenants of business premises from receipt of statutory demands and liquidation.

There are different facets of protection and it would be advisable to speak to a lawyer to learn your rights.

The reality is the rental bubble is about to burst and it’s up to landlords to either deflate the bubble and give businesses time to regroup or let it explode taking jobs, livelihoods and the face of our high street with it.

There needs to be a real understanding of the issues. It is no longer realistic to expect premium rents in the short or medium term. There is no tourism, consumer confidence is down and businesses are suffering from all things Covid.

There have already been casualties of the Covid crisis but there is a chance for the economic damage to be minimised.

There could be a silver lining to all of this and that could be that it’s the catalyst for a rental reset that so many businesses have been crying out for.

There are signs for tenants that we could be heading in a positive direction, with government investigating the possibility of removing the Gibraltar industry standard two-year rental premium on reassignment of leases.

This will make business sales more fluid and avoid company bankruptcies. A tenant is seriously hamstrung and has little hope of selling their business in the green, having to pay a two-year reassignment premium to the landlord.

Financial expectations need to take a back seat for a while, both for the landlord and tenant, landlords especially need to take on some social responsibility and a long view on their investments as none of us want to see a boarded up failed businesses in Gibraltar.

Orlando Yeats is a local businessman. He stood as a GSD candidate at the last general election.