COVID-19: Helping property businesses navigate through the pandemic
The Government has announced an unprecedented level of financial support to businesses in the wake of the COVID-19 pandemic. The aim is to help businesses with cash flow and to retain jobs such that businesses of all sizes and workers alike can survive the current crisis. The latest information on loan schemes and grants is available at support for business and a summary of the various financial support is included on our dedicated COVID-19 web page.
Below, we look at practical steps property companies can take to respond to COVID-19 cash flow pressures.
Cash flow management
Managing cash flow during the COVID-19 pandemic is critical for your business. Detailed short-term cash flow projections will provide clarity over the cash position and enable directors and management to make informed decisions about accessing government-backed loans and other grants. Optimising working capital, preserving liquidity through additional funding and understanding the flexibility of existing funding agreements are all key to weathering the pandemic.
The critical steps of effective cash flow management are:
1. Managing staff costs
The Coronavirus Job Retention Scheme (CJRS) is a useful option for businesses that need to reduce staff costs. CJRS is intended to keep people in their jobs who would otherwise be laid off or made redundant during the COVID-19 pandemic. Interest in this scheme from employers has been overwhelming. Property businesses are not generally large employers: even very large property groups can have relatively small numbers of staff relative to their balance sheet value – with the exception of the construction industry, which employs a large number of people.
How CJRS works
Under the scheme, HMRC will reimburse 80% of the wage of furloughed employees, up to £2,500 per month per employee. Employees placed on furlough must not carry out work for their employer or any linked or associated employer. HMRC will also reimburse employer National Insurance contributions and minimum employer auto-enrolment pension contributions in respect of the wages covered under the scheme.
The reimbursement scheme is now open via an online portal and will operate at least until the end of June: to be extended if the Government deems necessary.
2. Talk to your insurers - commercial insurance
Most commercial insurance policies are unlikely to cover pandemics, such as COVID-19, however, those businesses which have an insurance policy that covers government-ordered closure and pandemics, or government-ordered closure and unspecified notifiable disease should be able to make a claim (subject to the terms and conditions of their policy). Insurance policies differ significantly, so businesses are encouraged to check the terms and conditions of their specific policy and contact their providers.
Most insurers have indicated that existing cover will be maintained for policyholders’ premises that have become temporarily unoccupied as a consequence of government action or advice relating to COVID-19. This is subject to the policyholder endeavouring to ensure that policy conditions and security of the premises are managed and maintained while following government advice.
3. Cash flow impact of protection from eviction for commercial tenants under the Coronavirus Act 2020
Commercial tenants who cannot pay their rent because of COVID-19 will be protected from eviction. These measures, included in Section 82 of the emergency Coronavirus Act 2020, means no business will be forced out of their premises if they miss a payment in the next three months. For more information click here.
To protect cash flow, it is therefore important that you start discussions with your tenants as soon as possible. Clearly, it is key that you balance these discussions with your own commercial realities. Ensure that any communication with your tenants is clear and collaborative and that any decisions take into account your cash flow and your insurance provisions as well as those of your tenants.
Options you could offer your tenants, if cash flow allows, include:
- Accepting monthly instead of quarterly rents
- Rent discount for one, or more, period
- Rent-free period
- Rent deferment
- Using the rent deposit to pay the rent
- Accepting payments in arrears rather than in advance
4. Talk to your finance providers
Property companies are usually highly leveraged. If your company falls under this category, it is important that you keep an open line of communication with your finance provider to avoid any surprises. If your cash flow projections indicate that there is a possibility that the company is likely to miss a payment, you should plan ahead and be aware of any scheduled payment dates and, if necessary, negotiate with your lenders to defer scheduled payments. Capitalisation of outstanding interest may be another possibility to discuss with lenders.
The ramifications of the pandemic could also lead to a breach of financial covenants such as interest cover, cash flow and debt service cover. Depending on the period over which the financial covenants are calculated, this could potentially smooth out short-term difficulties. Again, it is imperative that borrowers engage with their lenders if they foresee a breach of financial covenants in the coming weeks.
Furthermore, it is common for property development companies to take a loan facility for property development. Given the UK wide lockdown and the resulting closure of construction sites, there will be a number of development specific provisions that could be breached, including failure to meet certain milestone deadlines, failure to fund cost overruns and abandonment of the development project. A lender may seek to assert that a cessation of work on the site (due to workers self-isolating at home) falls within the concept of abandonment. It is therefore important that you approach your lender to discuss the development plans and provide regular updates on the development projects.
5. Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS)
As businesses struggle to trade during the lockdown, short-term cash flow issues can arise as a result of projects being postponed or cancelled, pushing companies into financial difficulties. CBILS is designed to provide struggling businesses with the finance they need during the downturn and allow them to repay this debt once normal business resumes and businesses have returned to profitability.
- Eligible companies can borrow up to £5 million
- The scheme provides lenders with a government-backed partial guarantee (80%)
- Interest and fees will be paid for by the Government for the first 12 months
- Term debt and asset finance facilities can be taken over up to six years
- Overdraft and invoice finance facilities will be for up to three years
- The borrower remains 100% liable for the outstanding facility
The purpose of CLBILS is to provide financial support to large UK-based businesses that are losing revenue and seeing their cash flow disrupted as a result of the COVID-19 pandemic.
- Available for businesses with a turnover exceeding £45 million that are not utilising the Covid Corporate Financing Facility
- The borrower remains fully liable to repay the loan – the guarantee is for the protection of the lender
- A lender can provide:
- up to £25 million for businesses with turnover between £45 million and £250 million
- up to £50 million for businesses with turnover over £250 million
- All loans are available on repayment terms of up to 3 years
- Finance is available in the form of:
- term loans
- revolving credit facilities (including overdrafts)
- invoice finance
- asset finance