The end of rent arrears protection for tenants: how will landlord and tenant relationships evolve?
The recent judgement for non-payment of rent against The Fragrance Shop – the first reported decision on tenant liability to pay rent during the Covid pandemic – will have been reassuring news for landlords as the various pandemic-related defences put forward by The Fragrance Shop were defeated.
However the process of recovering rent arrears once the current moratorium on forfeiture and restriction on actions to recover unpaid rent falls away presents a huge challenge across the industry and wider economy. Recent estimates from the British Property Federation suggest that the rent shortfall for UK commercial property during the pandemic could reach £7bn by the end of June. How the recovery process plays out will be a difficult balancing act.
Managing the transition from the current moratorium
The recently published call for evidence shows that the Government does not trust the property industry to transition from the current moratorium on forfeiture and restriction on actions to recover unpaid rent without putting at risk the businesses that have been protected by those measures during the height of the restrictions placed on trading and movement. It is therefore considering how to manage that transition and, presumably, provide some continued protection to tenants as they re-open so that immediate action by landlords does not undermine their recovery.
Irrespective of the restrictions imposed by statute, landlords and tenants have largely sought to achieve a negotiated position in respect of how unpaid rents and services charges would be dealt with, much in line with the Government’s Code of Practice for commercial property relationships during the Covid-19 pandemic.
Does the overarching need to encourage and pave the way for economic recovery justify further interference by Government with the commercial bargain struck between landlords and tenants?
To transition or transform?
Some of the possible options go beyond limited transitional measures and would allow the original commercial bargain to be re-written. Those proposals should be of major concern to landlords, particularly those proactive landlords who have already been working with their tenants to renegotiate terms and settle arrears. The prospect of landlords being required to engage in a binding adjudication process with the potential result of lease lengths being reduced or extended is alarming. It also raises awkward legal issues, such as the impact of those changes on the interests of other affected parties, such as lenders, guarantors or superior landlords.
At the other end of the spectrum, there’s the suggested option of lifting the protections afforded to tenants and letting the market rebalance itself. It seems unlikely that the government will allow that to happen, their strategy appears to have been largely effective in achieving its aim of preserving jobs and it’s hard to see that being completely abandoned.
This approach has come at a huge cost for landlords who have suffered significant income shortfalls over a prolonged period. When able to do so, landlords will be looking to resolve the shortfalls as soon as they can – and they will be under pressure to do that from their lenders and other stakeholders. However the ability of landlords to continue to generate income from their assets will be paramount and that is dependent on having solvent and successful occupiers.
At some point that shortfall will need to be addressed, one way or another.
How many tenants will be able to repay that shortfall on top on their ongoing commitments? Many tenants, particularly in the retail and leisure sectors were already struggling pre-lockdown and factors adversely impacting those tenants before, such as high business rates and the shift to online, have not gone away. Will the shift towards more turnover based lease arrangements lead to a more collaborative landlord and tenant relationships?
It seems that the most likely outcome is a gradual unwinding of the protective measures, perhaps with the hardest hit sectors continuing to benefit from some protection while they find their feet.