UK stimulus rife with legal pitfalls for hoteliers
UK stimulus rife with legal pitfalls for hoteliers
19 MARCH 2020 8:37 AM

In the largest economic protection and stimulus plan since World War II, the United Kingdom government has outlined its help to hotels and hospitality businesses reeling from the COVID-19 outbreak.

LONDON—Amid the spreading COVID-19 coronavirus pandemic, hoteliers are forced to balance concerns for safeguarding guests and employees with seeking revenue and contemplating falling valuations, all of which must be considered from a legal perspective, sources said.

Thomas Page, global head of hotels and leisure at legal firm CMS, said hoteliers face tough decisions in six areas: Employees, landlords, lenders, taxes, insurance and insolvency.

As a result of this crisis, many hospitality businesses are likely to close—some temporarily, others permanently, he said.

“This is going to result in reduced hours/shifts, temporary layoffs—that is, putting employees onto temporary unpaid or part paid leave—and permanent redundancies, probably in very large numbers across the U.K. and global industry,” Page said.

“The (U.K.) government has offered to fund statutory sick pay for employees on 14-day self-isolation, but this is only available to smaller businesses, and the amounts are very small and will not be much help if the lockdown continues well beyond the first two weeks.”

The U.K. government has asked citizens to avoid pubs, restaurants, theaters and other public spaces, including hotels, and large gatherings have been postponed or canceled, but there is not yet any legislation that forbids going out.

Martin Fenlon, director of Vista Business Resilience Ltd., a consultant for the Business Continuity Institute and the former head of business continuity for the U.K. government, said “business continuity plans are usually based on managing a short-term disruption.”

Plans would need to be reviewed to assess the sustainability of the arrangements and to take into account other scenarios critical to the ongoing running of a business, including legal implications, he said.

Landlords are going to receive requests from operating tenants for some form of debt relief, Page said.

“Landlords will not want to forfeit leases as they will unlikely be able to re-let them in the short-to-medium term, and for operating businesses, unless the landlords were to close the businesses for a substantial period of time, they are likely to inherit all the employment liabilities automatically. So their best long-term interests may be in helping their tenants survive this crisis,” he said.

Lenders also will soon receive requests from borrowers for debt-service payments to be suspended and will face a similar problem if they try to enforce security, Page said.

“Lenders will also face requests for new loans to help cash flow, particularly in light of the Chancellor of the Exchequer’s announcement of £330 billion ($382.33 billion) of government-backed loans being made available to businesses that need it,” he said.

“But the government-backed loans will not incentivize hospitality businesses to not make redundancies or lay off staff, and that seems an obvious flaw. … Once these businesses close over the next few days, it will then be too late for the government to do anything to stop those job losses. If they want to avoid millions of workers being pushed into the welfare system, the government needs to act now,” Page added.

Kate Nicholls, CEO of UKHospitality, the U.K.’s principal hotel-industry forum, said “the focus now has to be on making sure that hospitality businesses can draw down the support loans and other funds while they still have businesses to operate, such are the levels of urgency for most businesses.”

Page said all hospitality businesses will now benefit from a 12-month business-rates holiday, and not just those small businesses that it was announced would receive the perk in the government’s latest budget, issued 11 March.

“Businesses should still file their tax returns on time, but if they do not have cash to pay value-added tax (sales tax), (pay-as-you-earn) or other tax payments immediately, they should apply for a deferral under the ‘Time to Pay’ scheme by calling up their normal tax office and requesting this,” he said.

Page also said it is important to keep a detailed record if told payments can be deferred.

Many hospitality businesses will not have insurance to cover disruption due to COVID-19, even if they are forced to close, Page said.

“Those businesses that do have business-interruption cover for notifiable diseases or epidemics should get advice on their policy terms to see whether they can make a claim and how much they will be able to claim for,” he said.

Page added that will depend upon the precise wording of the policy in each case and the factual circumstances affecting them—for example, whether they were legally obliged to close or whether they had an actual outbreak on their premises.

Page said when a business is in financial difficulty, the duties of directors switch from acting in the best interests of shareholders and employees to acting in the bests interests of creditors, and this comes with pitfalls.

“As part of this, the directors of a company that takes on additional liabilities, including supplier credit, drawdowns on existing loan facilities or new loans could be liable for wrongful trading if they know they may not be in a position to repay those liabilities,” he said, adding those extra liabilities could include stimulus money from the government.

Page said it is critical directors take advice on this specific issue before taking on such liabilities.

“With such uncertainty as to how long this situation will last, and therefore whether businesses will be able to repay loans in the future, this limits the practical usefulness of the government’s offer of loans,” he said.

More advice can be read on CMS’s dedicated coronavirus pages here, and there is more advice directly specific to the hotel and hospitality industry here and here.

Vista Business Resilience’s Fenlon added that the relationship between business and government will have to be closer than ever.

“Time will tell if the government response is effective, but it is interesting to note the high profile of businesses actively engaged in the response. In a previous emergency caused by wide-spread flooding, the supermarkets, (which) have more logistics than the military, said to government ‘they may be your citizens, but they are our customers.’ What you do or stop doing needs to be monitored for unforeseen consequences, but if you treat staff and customers well there is an opportunity here to enhance your reputation,” Fenlon said.

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