By Emma Bowman, solicitor in the real estate team at Hewitsons LLP
Much has been written about the plight of commercial tenants during the coronavirus epidemic and rightly so. If the economy is to recover once the virus is under control, tenants’ businesses will have to be viable and start trading again, despite long periods of reduced or no trading.
The position of commercial landlords is mentioned less but is of equal importance. The sole source of income for landlords is rent and if this has not been paid, or paid at a reduced rate, then landlords are just as vulnerable to the failure of their businesses as their tenants, with commitments to lenders which have to be fulfilled and potentially high costs and uncertainty associated with refinancing loans.
Some large retail landlords collected as little as 25% of all rent due in December 2020.
Although there has been no suspension of a tenant’s legal obligation to pay rent, legislative measures put in place during the pandemic have to some extent had a similar effect broadly including the following:
- Landlords cannot forfeit a lease for non-payment of rent until 31 March 2021
- No winding up petition can currently be presented against a tenant company
- The remedy of Commercial Rent Arrears Recovery (CRAR) has been limited with a minimum of 366 days of rent arrears currently required before a landlord can seize a tenant’s goods to the value of the debt owed
Landlords do of course have other options for recovery of rent, including pursuing lease guarantors or former tenants under authorised guarantee agreements, bringing debt recovery proceedings and drawing on rent deposits. Some government assistance is available for businesses, including landlords in the form of loans, and lenders are providing some support.
The government has issued a non-mandatory Code of Practice for commercial property relationships during the pandemic, which will apply until April 2021.
The code requires that landlords and tenants act collaboratively, with transparency and in good faith. Government support should be used by businesses to meet financial commitments, including rent, and both parties should act reasonably and responsibly to identify mutual solutions.
Landlords must find a balance between recovering as much rent as possible and obtaining possession of premises where tenants are no longer able to pay rent, with a view to re-letting, and hand helping tenants to avoid insolvency so that they are still trading when the economy does recover. There is likely to be less demand for empty premises for some time, depending on the nature of the premises.
It is now apparent that it is going to take a lot longer to return to any sort of normality than was anticipated last year. At some point, tenant protection measures will have to come to an end and then landlords will have to make decisions on whether to bring forfeiture proceedings against tenants with substantial rent arrears, bearing in mind that the courts may take a dim view of landlords who have not sought to cooperate with their tenants, with possible reputational damage.
Whatever happens, there is little doubt that, following the pandemic, there will be wholesale changes to the way space is used, particularly retail and office space.
It is landlords such as pension funds, local authorities and development companies that will be key to the regeneration and repurposing of this space. For example, former retail spaces could be repurposed for co-working, residential, consumer hub and life sciences use, in partnership with local authorities and with government assistance where available.
Landlords will be looking out for sustainable, future-proof investment opportunities.
When the end is in sight and tenant protection measures are eased, landlords must be able to make the best use of their properties in order to be able to contribute to ‘building back better’ and giving us all hope of a brighter future.