The commercial property world suffered arguably the worst disruption during the pandemic of any sector in the UK economy, having all of its rent collection and enforcement rights suspended by the government for two years between March 2020 and March 2022.
As well as those tenants whose own financial woes meant they couldn’t pay their rent, there were some high profile businesses that chose not to pay, despite being able to do so. The scale of the problem was highlighted by the British Property Federation, who reported in June 2021 that commercial rent arrears totalled £7.5bn, of which a third was owed by the embattled retail sector.
Ending of restrictions
The moratorium on enforcement action ended on 25 March 2022, at which point landlords could once more use the Commercial Rent Arrears Recovery process in respect of unpaid rent. However, there was a sting in the tail because the government then immediately legislated to introduce a binding arbitration requirement in respect of rent arrears caused by the pandemic. This partial continuing limit on collection lasted another six months until September 2022, when the arbitration scheme ended.
The Simpsons saga
The legacy of unpaid rent still facing landlords was illustrated in November 2022 when a news story about the forced closure of the iconic City of London eatery, Simpsons went viral. The landlords took possession of the premises and changed the locks, despite the current quarter’s rent having been paid and the tenant having the resources to pay the next quarter when it fell due in December. The problem was some £350k of rent arrears owed from during the pandemic, which had been frozen by government restrictions but not subsequently settled.
Recession and struggling tenants
The UK narrowly avoided falling into recession at the end of 2022, but it seems clear that 2023 will be a year of stagnation at best and more likely a shallow recession as the cost of living crisis continue to hit consumer spending power and a whole range of input cost increases affect the profitability of tenants, most especially energy costs coupled with higher interest rates.
The high risk sectors include: hospitality, retail, indoor leisure, the arts and entertainment.
Unexpected challenges from left field
Who could have predicted the arbitrary decision by the world’s richest man to make one of the world’s most celebrated companies suddenly decide to stop paying rent on their prestige Piccadilly Circus UK headquarters (and in many other locations worldwide). The landlord is now having to take court action to enforce its rights.
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Property business model disruption
Even before Coronavirus struck, commercial landlords were having to confront the need for fundamental changes to the basis on which they operated their businesses. Those unwilling to bend were faced with a tsunami of CVA cram downs. The process was accelerated by the pandemic. Lease terms have shortened, upward only rent reviews have disappeared, fixed rents have often been replaced by a turnover-linked basis, some surviving fixed rents have had to be discounted and quarterly advance payments have moved to monthly. All in all, there has been a very significant shift of commercial risk from tenant to landlord.
What now for commercial landlords?
Dealing with commercial rent arrears has always been a Judgment of Solomon issue. Press too hard, the tenant fails, vacates and the income flow stops. Added to this, full responsibility for the costs of the premises revert, so that insurance (which could double for vacant premises), maintenance, utilities and security costs start mounting for the landlord. If the premises remain empty for more than three months, the business rates bill must be paid by the landlord.
If there is a replacement tenant lined up or the premises will easily re-let, then enforcement may be a the better option, although even then rent free periods will almost certainly delay the resumption of the rental flow. If not, there may just not be ongoing costs to meet, but investment in re-purposing the premises may have to be considered. The recent experience of retail landlords following the collapse of some major high street chains is instructive. Adapting a failed multi-storey town centre department store for alternative part-residential, part-office, part-leisure and reduced retail usage takes time and will be very expensive.
Working with embattled tenants
A better way forward may be to work with the tenant rather than to enforce against them. The tenant may need time and they may need some financial reprieve, but what is essential is a constructive dialogue with transparency on both sides. The tenant must be open about their financial situation, the landlord must disclose what its agenda is – after all, landlords have financial pressures too.
It may be best for an independent financial adviser to act as a buffer between landlord and tenant, verifying what each party is saying to the other and helping with negotiations. The landlord is more likely to accept what the tenant is proposing if it has been translated into ‘the art of the possible’ by an independent expert, who understands what is achievable given the circumstances of the tenant and what it is reasonable for the landlord to agree.
How we can help
We have extensive experience in working with businesses to provide advice and facilitate financial and legal arrangements, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at email@example.com or call us on 020 3326 6454 and we will arrange for a call with one of our Partners.