Insights on the leisure and hospitality sector – challenges and opportunities in the year ahead

Spring is in the air, and as we emerge from a third lockdown in the UK, there is a cautious optimism that we are moving into a new phase where we can start enjoying those things which until March last year we all took for granted. The UK's vaccination plan is central to the Government's aspiration that this time the easing of restrictions will be irrevocable. However, it is clear that in the wake of Covid-19, the world we experience will be different from the one we left behind.

There is currently a dizzying cacophony of commentary predicting how our lives will change as a result of the pandemic. As a lawyer advising clients in the retail, leisure and hospitality sector, it is clear that Covid-19 has accelerated a number of changes in consumer habits and economic structures which might have otherwise played out over the course of a decade. This has thrown up all manner of challenges and opportunities for our clients and last week our firm hosted a timely virtual panel discussion on this very topic.

The panel comprised of two operators, a hospitality consultant, a property agent and two real estate lawyers from Fieldfisher, Ramatu Banga and Antony Phillips.  Below is a summary of what I took away as interesting and thought provoking insights – some directly relevant to the work I do, some for the sector more generally, and also a few interesting glimpses of how our lives – particularly for city dwellers – might change. If nothing else, this will serve as a time capsule summary of thoughts and it will be interesting to revisit this next year to see how it stands up to our lived experience:

• The UK Government will stick to the current timetable for easing restrictions and won't speed it up. Many businesses in the sector were disappointed at the slow pace of the timetable, but at the third attempt the Government's default mode appears to be caution and at least this has allowed business time to prepare.
• City centres will continue to struggle for some time, whilst the suburbs will thrive. A number of employees are adopting hybrid return to work models which means that the daily commute may well not return to what it once was. International tourism is likely to remain suppressed for some time. This has a knock-on effect on economic activity in city centres which require a certain level of density. One the operators said that their London pubs (concentrated in the City of London) will not re-open until at least September for this very reason. However, for businesses which can adapt and thrive in a suburban environment, now is the time to start considering expansion.  
• That being said, for many businesses the short term focus is on survival. Many businesses are cash poor and heavily indebted with Government-backed Covid-19 loans and rent arrears. It will be a challenge – financially, operationally, culturally – to bring back a workforce which has been on furlough for much of the last year. As one operator said, the focus is to "get some wool on our backs" to help the business build up resilience as quickly as possible.  
• Many businesses have been adapting their operational models during the last year. Some already had a head start and have seen strong growth, for others, the revenue derived from new channels has been a life line but not a replacement, and there are examples of businesses which have actually grown their revenue beyond pre-Covid levels by using premises differently and focussing on online and delivery channels. The coming months will see businesses start to integrate these changes into more permanent aspects of their model, as well as looking at new opportunities, such as those mentioned in 2 above. Operators do not expect a hedonistic unlocking in June. They expect many consumers are not ready to relax back into old habits and making them feel comfortable and safe will be paramount – which has a direct impact on venue capacity and service levels/delivery.  
• Operators would like to see new Government backed schemes to help businesses during this period. In the United States, Government loans have been converted into grants, and a similar course of action in the UK would help with the high debt levels. A return of the Eat Out to Help Out scheme and/or permanent reduction in VAT would be an invaluable shot in the arm (forgive the pun).  
• From a legal perspective, businesses are facing a cliff edge in July when the temporary protections against lease forfeiture, statutory demands for unpaid debts and the suspension of liability for wrongful trading by directors all fall away. The panel speculated on the following:​
• They expect to see a lot of new law/guidance emerging during the summer regarding how the English courts will adjudicate on landlord and tenant disputes relating to rent arrears. It is likely that the conduct of the parties will be a factor, including if their behaviour is consistent with relevant codes of conduct.
• They expect that the Government is concerned about this cliff edge and the potential it has to suppress a recovery. It is possible that the Government will introduce new legislation, which might include a phased withdrawal of the protections for certain sectors.
• It is therefore important to make representations through industry trade bodies now to make sure the Government listens to businesses before formulating its response. The focus should be on how protections for this sector will play a big role in protecting jobs and thereby ensuring a quicker and more sustainable recovery.
• Now is a good time to strike that elusive deal with your landlord. It is likely that the courts will be overwhelmed with rent disputes. These delays favour the position of tenants and many landlords will be keen to get cash in now and will be wary of further changes/protections down the line.
• ​Moving forward, the standard terms of leases are likely to change. There may be shorter terms, more break options, Covid clauses (for example, suspending rent during a future lockdown, or perhaps more likely a sharing of the pain), a narrowing of the grounds for forfeiture, more turnover based rents (for example, a base rent with a turnover top up), and longer rent-free periods where fit outs to premises are required. For my perspective, some of these predictions are analogous to how franchise agreements (which often involve leased premises) may evolve over the coming years. This is a separate topic in itself, but with changes to operational models and new opportunities in different trading environment and channels, I expect to see more conditions placed around development schedules and an increased desire for trial or "pilot" franchising, and possibly shorter terms/more frequent renewals. In the coming year, as franchisors take stock of the lessons that can be learnt, I anticipate that agreements will contain more explicit terms regarding future proofing and clearer rules and protocols around the impact of external factors which hinder or suspend trade. We are already seeing an acceleration in the trend for franchising models to embrace a multi-channel partnership with franchisees.  
• Operators are not keen on the idea of vaccine passports and adopting the role of policing this at their venues. It creates a number of challenges over discrimination and data privacy issues, and the current focus on hospitality seems unfair – there is an argument that all indoor venues should participate if this is going to become the norm, so cinemas, gyms, retail shops etc.
• Longer term, despite some of the doom and gloom commentary, and as mentioned in 2 above, we can expect some suburban high streets will prosper and thrive (particularly those around large cities) as businesses which had previously focussed on city centres adapt their models and move in, and new concepts emerge to meet increased local consumer demand.   
• Equally, city centres may well emerge stronger. Although overall numbers of commuters may diminish, when office workers do travel in, it is expected that the main draw will be to use that time to socialise and spend time with colleagues and friends (you can sit at your desk at home for hours after all). This means that an individual's financial spend when they are in the city is likely to increase from pre-Covid-19 levels, which might off set the reduction in overall numbers. If we see the expected trend for down-sizing in office space, it is likely that the office work space will be re-configured to encourage a more socialable way of working, which itself will encourage more workers back – the power of FOMO. And finally, surplus office space may be converted into residential units, creating thriving communities in the heart of a city – although this will require a bold vision from the Government, which it has not yet articulated.

These are 10 observations for the leisure and hospitality sector and it will be interesting to see how these measure up to reality in the coming months and years ahead.

If you would like to view the panel discussion, you can access it here via Fieldfisher's YouTube channel.