Protection for tenants from landlords during COVID
December 10, 2020
This has been the year when far too many commercial chickens have come home to roost as Covid has torn through the economy, laying waste to long-established business models and bringing even some of the strongest enterprises to their financial knees. Few industries have seen a greater reckoning than commercial property, except of course their shattered tenants in the leisure, hospitality and retail sectors. The government stepped in very early in the pandemic to protect these tenants from what many perceived to be their predatory landlords.
The government support for tenants
A raft of measures was brought in almost as soon as the first lockdown started, effectively neutering all of the options traditionally used to enforce the payment of rent on commercial premises, including forfeiture, eviction, Commercial Rent Arrears Recovery (CRAR) and winding up petitions. This intervention was part of multi-faceted efforts to support and preserve as many businesses as possible.
These prohibitions were originally intended to be short-term until late June 2020; they have now been extended three times as the impact of the crisis worsened and then the second wave of infections hit. They are currently scheduled to expire at the end of March 2021. For what little it may be worth, the government has promised that this will be last extension.
There is little doubt that many tenants have seen their finances and their ability to meet fixed costs like rent devastated by the bewildering succession of lockdowns and ever-changing restrictions. As such, the relief may have gone a long way to help them to survive until commercial activity starts to return to whatever the new business normal may turn out to be. Sadly, the government’s support has been abused by a number of high-profile businesses, who can afford to pay their rents, but have chosen not to.
The damage to commercial property
The consequential damage to the commercial property world has been on an unprecedented scale. The British Property Federation estimated in November 2020 that rent arrears across the commercial property sector have been growing at the rate of £1.5bn a quarter since the start of the pandemic.
Worse still, landlords are being forced, often through Company Voluntary Arrangements (CVAs) to grant permanent rent reductions or a move to turnover-based rents. This has more than just a negative impact on their profits; it also impairs the value of their assets because this is directly linked to the rental stream each property generates. In turn, this threatens viability as lenders become concerned about their loan to value covenants. The figures are eye watering. The listed retail landlord, Hammerson wrote down its property portfolio by £1bn in 2019 and there will be further significant provisions this year. The public view has long been that landlords are the bad guys and can withstand this sort of bad news, but another major retail landlord, Intu went into Administration earlier in 2020.
Problems have been brewing for years
This collateral damage from the pandemic is not the only cause of distress for commercial landlords. Problems have been brewing for years, as the traditional model of long-term leases at fixed rents subject to upward-only reviews has failed to adapt to a dynamic and fast-changing business world. CVAs are not a new phenomenon, nor are turnover rents. Covid has accelerated trends, which date back many years. Property ownership and occupation is no longer a master/slave relationship, it is rapidly turning into a new form of business partnership where landlords are having to assume what amounts to equity risk.
This is definitively not a great time to be a landlord, but it is well worth noting that research by Estates Gazette earlier this year revealed that around 60% of all commercial property was owned directly or indirectly by individuals through their pension schemes or investments in listed landlords, or else by charities. The government’s current bias in favour of tenants over landlords is not a policy without victims.
Temporary relief
For tenants, the temporary relief from rent payment has been a blessing but not necessarily a cure for their ills. The fact that a landlord has been prevented from collecting rent does not mean that this liability has gone away, except if a deal has been done to reduce it. There is a potentially painful day of reckoning coming when the handcuffs are taken off landlords and their lawyers.
Unfortunately, rent is not the only debt that has been building up. There will be any pre-June VAT deferred to March 2021 and maybe PAYE delayed under a time to pay arrangement. Many businesses took advantage of the various government-backed funding schemes, such as Bounce Back Loans. Any initial interest or repayment holidays will soon end, putting another outgoing into the cash flow. From next April, business rates will become payable once again by leisure and retail businesses.
It is vital that tenants understand the implications and face up to the realities of their financial position. There may currently be no sanctions for Wrongful Trading because of another temporary piece of government indulgence, but that does not mean that directors are free to keep on trading, oblivious to the downside risks for themselves and their stakeholders. Personal guarantees to banks and others have not been cancelled and a range of sanctions against reckless or deliberately fraudulent directors remain in place. Above all, they have a moral and a fiduciary obligation not to cause unnecessary losses for their suppliers and service providers.
If directors of tenant companies or commercial landlords have any doubt at all about the viability of their business, it is imperative that they take independent expert advice as early as possible while constructive options remain open to them.
If you have any concerns having read this article, please do not hesitate to contact one of our Partners for a confidential no obligation chat.