This article has been be co-authored by Chancerygate’s head of asset management, Rory Finnan, and Paul Tomkins, partner and head of property litigation at national law firm Freeths.
Despite some businesses being unable to trade fully during recent months as a consequence of the Covid-19 pandemic, there is still an obligation on tenants to pay rent due under their leases of commercial properties.
To protect businesses, government restrictions have been put in place, reducing the options available to landlords when it comes to recovering unpaid rent during this turbulent period.
In the absence of these remedies, landlords must engage and work collaboratively with occupiers to both minimise their rental arrears and protect the solvency of tenants. This interaction will become even more imperative as we move out of the Covid-19 rental recovery restrictions.
What are the current Covid-19 rent restrictions on commercial property?
There are usually four main remedies which can be taken by a landlord if a tenant refuses to pay rent:
When the first lockdown was imposed in March last year, there was panic from tenants, particularly those who were no longer able to trade from their premises. Tenants were not sure what to do as, by law, they were unable to use the property, but were still obliged to pay rent. Likewise, landlords had concerns around what to do if tenants didn’t pay their rent.
In light of the pandemic, new legislation was introduced to prevent landlords from using three of the four remedies for rent enforcement.
The only remedy which can be utilised before the end of March this year is the issue of court proceedings. Many landlords are reluctant to issue court proceedings against occupiers, and instead want to engage with tenants to agree individual payment plans. Factors such as the landlord / tenant relationship, the viability of the tenant’s business and whether the premises can be relet are important determiners within these discussions.
The issuing of court proceedings in respect of unpaid rent became more popular during the last quarter of 2020, especially against occupiers who opted not to pay rent but are still operating from their premises. A high-profile example of this is health and beauty retailer Boots, which has been classed as an essential store and operated throughout the pandemic, but has refused to pay rental charges for some of its stores.
In practice, engagement between the two parties is integral to finding a viable agreement which works for all involved.
Landlords engaging with tenants to reach agreements
At the start of the first lockdown, there was obvious nervousness and concern around how difficult tenants would find it to pay rents. Chancerygate engaged very early on with tenants to discuss a plan moving forward based on our occupiers’ circumstances. Some wanted to defer payments to be repaid later in the year and others opted to pay rent monthly rather than quarterly.
Across our industrial portfolio, we have collected all rent due for the first two quarter days (March and June) and over 95 per cent of September’s quarterly payments.
Industrial occupiers have been (on the whole) extremely resilient and able to return to the workplace whilst following social distancing guidelines. Builders, manufacturers and mechanics cannot work from home and don’t require a ‘retail’ store, which allows businesses in these sectors to operate in line with guidance. This, in turn, has enabled a positive cash flow and allowed rent to be paid.
However, the collection rates for mixed-use properties are much lower. After shoots of recovery across the late summer and early autumn, the second lockdown has pushed many businesses, in particular in the retail and leisure industries, to the brink.
The latest announcement of the third lockdown and tightening restrictions across the UK will cause problems for some leisure and retail businesses, whereas industrial and warehouse occupiers can’t work from home, therefore are able to keep trading.
Moving out of the recovery restrictions
Tenants who are unwilling to engage with landlords must understand any monies owed have not been written off – they are still arrears to their account. Not paying brings significant risk of litigation to recover unpaid sums once restrictions are lifted.
The government is likely to reinstate recovery remedies across the board rather than taking a regional, sectorial or tiered approach. However, if all the restrictions are lifted at once, it could create a potentially devastating impact for some tenants
This is where the engagement between landlords and tenants is imperative. Agreements need to be in place between the two parties to mitigate the risk of high levels of company’s entering into insolvency.
It is not in best interests of landlords to take good, long-term tenants to court over unpaid rents, so working together to find a resolution is best for all parties. Going to court takes time, is costly and can bring reputational damage to the landlord in instances where aggressive action is taken and is well publicised.
From a tenant’s perspective, cash flow is the primary issue. During the first lockdown, tenants may have been reluctant to part with their money when going into the ‘unknown’. However, in many situations, trading has been and is able to continue, and initiatives such as the furlough scheme and government grants have enabled strong levels of cash flow.
Finding a solution to suit all parties
Covid-19 has brought with it circumstances which both landlords and tenants have never faced before.
To overcome the financial adversities of the pandemic, proactive engagement between landlords and tenants is essential.
Through working collaboratively to find a solution, an outcome can be agreed for rent payments which works for all parties involved and mitigate the risk of remedies being taken.
At Chancerygate, our asset management team currently manages £255m of assets across five million sq ft of commercial space in more than 392 units. To find out more about our asset management team, click here.
Freeths is a national law firm and a leading expert within the real estate sector. Find out more about Freeths’ real estate legal services here.