What next for commercial landlords and tenants?

The Government’s moratorium on all forms of possession action and debt recovery for three months has had the effect (as did Brexit) of kicking the can down the road. Tenants have breathing space for now but what happens after June if the moratorium is not extended at that point?

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Unless a landlord has agreed to waive the rent due for the March quarter then, come July, many tenants who have been unable to pay some or all of this quarter’s rent will owe up to six months’ rent as the next quarter falls due for many on 24 June.

Even if the economy returns to running at pre-COVID speed, which seems highly unlikely, most businesses that have been closed won’t be able to make up all the lost trade, particularly those operating in the hospitality and leisure sectors. If landlords seek to enforce their rights, there could be thousands of business failures and investment in furloughs, rate release, business loans will have all been for nought. It may be that some of the smaller businesses that have taken advantage of all reliefs and some of the larger businesses with deeper pockets will survive but there will be many in the middle who will not. In turn, if tenants don’t pay their landlords the rent that is owed then many landlords may be in difficulty with their lenders.

It also seems likely that any release of the lockdown will be slow and phased, with many businesses still unable trade for a long time to come, either fully or partially. In addition to this financial burden, the press has reported that the furlough scheme will be modified or phased out, potentially adding to business costs.

Whilst some landlords and tenants have taken a long term and measured view, simply asking them to co-operate may not be enough. Until the Government intervened, others were threatening enforcement procedures and the fact that measures were required to this indicates that not all landlords want to take this approach or can afford to take a relaxed view to receiving rent.

Currently, two schemes to ameliorate these effects have their supporters – rent abatement (seemingly having originated from the #NationalTimeOut campaign) and rent support (Furlough Space Scheme).

Rent abatement

This proposal has the backing of several large companies in the hospitality and food industries, such as Pret a Manger, Prezzo and Nando’s and well-known figures, including Nigella Lawson and Michel Roux jnr. The suggestion is to have a national rent holiday for a period of time and, potentially, to make all rents turnover related until sales figures recover to pre-COVID levels as a minimum. The reaction of lenders to these notions will be fascinating to watch. With the proposal that tenants don’t pay landlords, lenders aren’t going to see repayments or, at the very least, landlords will struggle to make repayments. Therefore, it’s clear that lenders will need to be involved and the maths is likely to get very complicated.

Rent support

Similar to furlough for employees and attractively named the Furloughed Space Grant Scheme, this would require the Government to pay some or all of the rent. A scheme like this has been introduced in Denmark. Subject to any terms and conditions attached, this option seems attractive to landlords, tenants and lenders. Given the level spending already injected to keep the economy afloat through the crisis, the Government may be less convinced of its merits. However, if the alternative is millions of jobs and thousands of businesses lost which leads to a severe recession, it might be a price worth paying. The cost to the economy of thousands of people, currently furloughed, being made redundant, and businesses and landlords defaulting on loans, may lead to an L shaped recession rather than one that is V or even U shaped.

Should the Government decide to halt investment and reject these plans, it might be argued that it would have been preferable to have stuck with its initial herd immunity proposals and avoided lockdown, as Sweden did. This would at least have kept the economy running. The financial implications could be difficult for many if the situation is not proactively addressed.

What does this mean for you?

Without steps being taken by the Government to adequately ameliorate the position, many landlords and tenants may need advice on the options available to them as they seek to secure their position. Ultimately, such a scenario may mean some difficult decisions will need to be taken if both landlords and tenants are to survive. It cannot be in the collective interests of landlords to jeopardise the economy by demanding its money in July since, as a group, they will then be left with an awful lot of empty premises.

We have already set out a number of options for both landlords and tenants, the applicability of which will depend on your individual circumstances. If the Government has not announced any proposals for dealing with this situation by June and you are a landlord or a tenant, we would recommend that you get in touch to discuss your options and how they might apply to your specific situation so that you are fully prepared in the months ahead.

Learn more: https://www.buckles-law.co.uk/blog/what-next-for-commercial-landlords-and-tenants/

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