How can commercial property landlords and tenants survive the next few months?
This article was originally featured in Commercial News Media on 27 May 2020.
We are in uncharted waters. Never before, in living memory, has there been a public health emergency of international concern with such far reaching consequences for all of us. Non-essential shops and community spaces were (and to a large extent still are) closed, the vast majority of us were told to stay at home and friends and family could not meet up with each other save for in very specific circumstances.
But, how does and will this affect commercial property landlords and tenants who are in a battle to survive in this unprecedented time?
Rent and enforcement
The vast majority of commercial leases require payment of rent on a quarterly basis (in advance) on 25 March, 24 June, 29 September and 25 December. Very few leases allow for a tenant to withhold rent regardless of the circumstances.
It was, therefore, very timely (for tenants) for the government to announce two days prior to the March quarter day that tenants who cannot pay rent because of coronavirus be protected from eviction until at least 30 June 2020. The resulting Coronavirus Act 2020 came into force on 25 March 2020 and, with immediate effect, leases could not be forfeited for non payment of rent until 30 June 2020.
Having sensed that landlords were using other methods of enforcement, one month later the government announced a temporary ban on the use of statutory demands (made between 1 March and 30 June 2020) and a ban on exercising commercial rent arrears recovery action unless the rent is 90 days in arrears.
Some analysts have said that more than 25% of rent due in March was unpaid. So, what can a landlord do if their tenant stops paying rent?
The hard line approach on enforcement that applied little more than two months ago is for now, not an option. Instead, there is more of an emphasis on encouraging parties to work together. It is for both landlords and tenants to be open, honest and sensible with each other. Tenants should not feel afraid to approach their landlords to explain their financial difficulties provided that they can offer a sensible solution.
At the same time, landlords must consider reasonable proposals from their tenants. That may include a rent suspension, rent reduction, draw down of part or all of a deposit or re-gearing of the lease (any of which should be clearly documented in writing). McDonald’s, for example, has been in talks with some of its landlords about a rent reduction “for a short period due to [the] restaurants not trading.” However, nothing in the legislation operates to defer or waive a tenant’s obligation to pay rent.
As a last resort, a landlord can commence a money claim against their tenant for rent arrears but this is not a quick or cheap solution.
Ultimately, it is likely to be a tenants’ market for some time yet and the last thing landlords will want is vacant premises and/or pursuing historic rent arrears in a liquidation. There is clearly a balance to be reached which will be fact specific to each case.
Balancing the needs of landlords and tenants – what should the government do?
From whichever political persuasion you may be from, most people will agree that the government found itself in the unenviable position of having to make a quick decision with far reaching consequences. Inevitably, a “one size fits all” approach had to be implemented.
It became clear that whilst the news came as a welcome relief to tenants nationwide, it caused frustration and anger amongst some landlords – many of whom have their own financial commitments and some of which are owned by pension fund companies from which millions of people rely on a current or future income.
Multi-million and multi-billion pound organisations, such as Burger King, Boots and Matalan, did not pay their rent on time. Some will argue that they are taking advantage of a system intended to protect those with fewer financial resources at their disposal. It will have been even more frustrating for Burger King’s landlords to hear that they anticipated difficulties paying future rent too and were calling for a nine month payment break.
Conversely, however, it is difficult to overstate the devastating impact on a business that sees its income disappear overnight. Many of those businesses do not have financial reserves nor the same borrowing power as larger organisations. Those businesses are the lifeblood of our high streets, industrial estates and they provide employment opportunities for millions of people. But, given what we have seen in recent times, it would be naïve to assume that all of the businesses will survive, regardless of the support provided.
So, what should the government do?
It is very difficult to say because any decision will have far reaching positive and negative consequences. Time is running out though. The June quarter day is approaching, as is 90 days from 25 March.
The suspension periods set out in the Coronavirus Act 2020 can be extended, and arguably should. The treasury has recently announced a further three months’ extension to the mortgage deferral scheme (with an opportunity to make reduced payments) which applies to homeowners whose finances are affected by coronavirus. That may not be appropriate here but perhaps a middle ground could be a statutory framework which leads landlords and tenants back to normality gradually, similar to the plan for phasing out the job retention scheme. Or even a government backed loan facility scheme that guarantees a certain percentage of rent.
Given that the restrictions on enforcement were, according to the Business Secretary, Alok Sharma, designed to prevent a “minority of landlords using aggressive tactics to collect their rents…”, perhaps any relief available to commercial tenants should only apply for businesses which can show a substantial negative change of circumstances attributable to coronavirus and also be able to evidence that there are no other means in which they can reasonably fund their commitments, for example loans or grants. Those that are unable to meet these criteria could, perhaps, be subject to enforcement action in certain circumstances.
Regardless, it would be remiss of landlords and tenants not to keep up to date with forthcoming changes issued by the government.