COVID-19 and the UK commercial property industry: the Furloughed Space Grant Scheme

The UK government has implemented several relief measures to date to help businesses with property costs amid the COVID-19 pandemic. For example, it has granted a 12-month business rates holiday for retail, leisure and hospitality businesses, and introduced a short-term moratorium on forfeiture for non-payment of certain amounts, including rent. 

On 23 April 2020, the government also announced plans to introduce legislation temporarily preventing the use of statutory demands and commercial rent arrears recovery (CRAR) by landlords against tenants who are unable to pay rent due to the pandemic.

Despite these measures, the underlying liability to pay rent and service charges remains with tenants. Landlords of properties let to those tenants are struggling in the face of declining rent receipts in addition to their ongoing payment liabilities to lenders.

As fears grow that economic recovery from the pandemic will take some time, the commercial property industry is proposing that the government introduce further relief schemes to assist both landlords and tenants (and, through them, the whole commercial property ecosystem, including lenders and the pension funds invested in the industry).

One such scheme is the Furloughed Space Grant Scheme (FSGS), which was proposed by the British Property Federation (BPF), the British Retail Consortium (BRC) and Revo in a letter to the Chancellor, Rishi Sunak.

It involves the government paying a proportion of the fixed property costs of businesses affected by COVID-19, similar to schemes that have been implemented in parts of Europe, such as Denmark.

The proposal is limited to businesses in the retail, leisure and hospitality industries (although encourages the government to consider extending this to sectors where similar stresses emerge).

The fixed property costs covered by the government would be determined on a tapered basis depending upon the proportion of revenue lost by the tenant. The proposal recommends that the government would pay:

• 100 per cent of fixed property costs where a business is not trading;
• 80 per cent of fixed property costs where turnover has decreased by 80–100 per cent;
• 50 per cent of fixed property costs where turnover has decreased by 60–80 per cent; or
• 25 per cent of fixed property costs where turnover has decreased by 40–60 per cent.

Applications for relief would require either a self-certified or audited forecast of the actual and expected drop in turnover during the lockdown period (ie from 24 March 2020 until the lockdown is lifted).

The government would have the ability to claw back any overpayment once the relevant period ends and the true impact on turnover is known.

The primary hurdle of the current FSGS proposal is that it meets the criteria for state aid as defined under EU legislation. While the Danish scheme similar to the FSGS was recently approved by the European Commission, there appears to have been stringent requirements on Denmark to show that their scheme would qualify under the ‘exceptional occurrences’ test required. 

Satisfying these onerous criteria makes it more uncertain whether the UK government will adopt the proposal, especially as it has shown a limited appetite for state aid notification so far during the pandemic. However, should the UK government progress the FSGS, it may adapt the measure to ensure that it fits within the more flexible COVID-19 state aid temporary framework (potentially capping the rental support to €800,000 per undertaking, as implemented in Sweden).

A further question is how the proposed scheme would operate in practice and whether payments under the scheme would be made directly to landlords or via tenants. If the latter, the scheme would need to include mechanisms to ensure that tenants pass on the payments to the landlords. One potential solution could be to require tenants to agree to pass the benefit to landlords (as a condition of qualification for relief) in return for more favourable rental terms.

Additional questions involve determining the duration of the scheme, particularly given the growing belief that there will not be a 'V-shaped' economic recovery, and any financial limits, such as a turnover cap on qualification for relief.

The UK government has so far resisted calls to implement business relief schemes targeted at specific sectors, such as a proposed bailout of universities, on grounds that certain industries should not be treated preferentially to others. Because the proposed FSGS scheme is primarily sector specific, focusing on the retail, hospitality and leisure sectors, it is questionable whether the government will be receptive to its implementation in its current format.

In announcing his plans to introduce new legislation temporarily preventing landlords from using statutory demands and CRAR against tenants suffering from the impact of COVID-19, the business secretary, Alok Sharma, acknowledged that landlords are 'under pressure' as well as tenants. 

However, he urged landlords to show forbearance to their tenants and to take advantage of existing government relief schemes, such as the Coronavirus Business Interruption Loans Scheme. This could indicate that the government does not intend to legislate further to protect the commercial property ecosystem by implementing proposals such as the FSGS. 

We have yet to see the government’s response to the proposal but we understand that discussions are ongoing, with a desire to find a solution ahead of the next quarter day at the end of June.