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Real estate disputes: Update on hospitality and leisure sector

real estateWhile the UK has seen improvements in managing the COVID-19 pandemic recently, uncertainties persist within the hospitality and leisure sector. However, amidst these challenges, there’s an intriguing shift in the dynamics of landlord-tenant interactions. Myerson Solicitors’ Property Litigation Lawyers explore the progress and challenges faced in 2023 for H&L companies.

Backdrop

The hospitality property market faced a bleak outlook at the start of the year, with reports indicating the closure of nearly 18 licensed premises daily during Q4 of 2022. This resulted in a net closure of 1,611 licensed premises, surpassing the loss recorded in 2021 despite more stringent COVID-19 restrictions. The latter half of 2022 witnessed over 75% of closures, primarily impacting independent businesses. Similarly, the leisure industry experienced setbacks in 2022, with a YouGov poll revealing cutbacks in household spending on day trips, cinema visits, and gym memberships. However, there was a notable increase in consumer spending on recreational and cultural services in the UK in 2022 compared to the previous year.

2023: Progress and challenges

The hospitality industry’s challenging end to 2022 extended into 2023, with 10% of administrations in the first half of the year attributed to this sector. Factors such as economic uncertainty, high interest rates, and inflation contributed to 79 hospitality businesses filing for administration. Rising costs, particularly energy bills and food expenses, added pressure on hospitality companies, known for their thin profit margins. Additionally, the 6.7% increase in the Consumer Price Index (CPI) by September 2023 intensified challenges for small hospitality businesses, leading to altered business plans and reduced spending by consumers.

A cause for optimism

Despite these challenges, large businesses in the UK showed optimism about the economy in September 2023, driven partially by the growing popularity of “active leisure” tourism. The leisure industry also saw an increase in gym membership fees, contributing to record-high market values. Moreover, spending in the hospitality and leisure sector rose by 8.5% in September 2023, driven by increased spending in bars, pubs, and clubs.

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Investment trends

The fallout from COVID-19 and the cost-of-living crisis resulted in low investment demand, with only 13.9% of demand for leisure and hospitality industry assets in England in Q2 2023. Although sales demand slightly improved in Q3 2023, the sector remained the least favoured for commercial property sales, mainly due to reduced household spending.

Impact on landlord-tenant relations

Landlords in the hospitality sector responded to tenants’ challenges with flexibility in 2023, including forgiving COVID-19 arrears and altering fixed rents to turnover rents temporarily. This reciprocal relationship between landlords and tenants has led to the emergence of leases structured on turnover rents, providing support during uncertain times while ensuring landlord income. Ad hoc agreements, however, pose risks, leading to the use of side letters and redacted leases to avoid setting precedents.

Conclusion

While recent statistics paint a concerning picture for the hospitality and leisure sector, there are also positive developments, particularly in the evolving landlord-tenant relationship. This trend highlights the potential for mutual support amid uncertainty in the industry.

Tags: Investment trends, landlord-tenant relations

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