Leading UK REITs British Land and Landsec, in partnership with the British Property Federation, have joined forces to create what they are terming a practical solution to lifting the ongoing moratorium on commercial tenant evictions.
The plans propose ring-fencing historic rental debt, reinstating rental payments moving forward, and then taking a phased approach to reaching agreement on accrued rental payments. They also propose a range of enhancements to the Code of Conduct between landlord and tenants.
On 10 March the government once again extended the now year-long moratorium on commercial property tenant evictions, this time until at least the end of June, with a call for evidence subsequently launched on 7 April to decide on a way to resolve the situation. The review of commercial landlord and tenant legislation is considering a broad range of issues including the Landlord & Tenant Act 1954 Part II, different models of rent payment, and the impact of coronavirus on the market.
The British Property Federation has estimated total unpaid rent for UK commercial property between late March 2020 and the end of June 2021 will be up to £7bn if the present rate of rent nonpayment continues. It says rental arrears stood at £4.2bn by the end of 2020 and the moratoriums are creating an increasingly serious problem for both property owners and their customers.
The government introduced the ban — the most notable intervention in the traditional landlord and occupier relationship during the pandemic — in April of last year to prevent tenants unable to pay rent from being evicted and extended it in the summer to 30 September. In December, it pushed it out until March of this year but pledged this would be the last time.
Prefacing their solution in a joint statement this morning, British Land and Landsec say the moratorium was an important temporary measure at the time it was first introduced but as trading conditions begin to normalise and UK consumer confidence continues to strengthen, “it is right that the government is now looking at how to withdraw the moratorium in a way that protects those businesses that have been hardest hit by the pandemic”.
The duo says owners have worked hard over the course of the pandemic to support their customers, and it is now urging the government to create the conditions to bring property owners and occupiers together to negotiate and constructively manage rent arrears where arrangements have not been concluded.
The duo’s “practical solution” seeks to protect occupiers and jobs, and “enables the market to return to normal as the economy re-opens”, it says.
It in part proposes separating the treatment of rent arrears from the period when businesses were impacted by trading restrictions from future rents as the current restrictions lift.
The phased approach would involve the moratorium ending on 30 June 2021, with normal market operation resuming from this date. Any rent billed on or after June quarter day (25 June) will not be ring-fenced alongside historic arrears but payments owed from before this date (the period of trading restrictions from March 2020-May 2021) would be ring-fenced with the moratorium remaining in place with respect to those arrears.
Landlords and tenants would then have until December 2021 to agree concessions where appropriate. Under the proposals payments could be deferred until after this date as long as an agreement has been reached. Current protections around existing debt would continue after December 2021 “where both parties have submitted to arbitration having failed to negotiate a deal”.
Where an occupier and property owner are unable to reach a settlement, they would submit to binding arbitration and then an enhanced code of practice would support all parties in “reaching a fair outcome”.
The duo writes: “We believe this phased approach would address the issue of rents owed, while giving occupiers the breathing space they need to recover from the effects of the pandemic, provide property owners with the certainty required to enable new investment into town and city centres, and help drive economic recovery from COVID-19.”
Mark Allan, Chief Executive, Landsec, said in the statement, which has been published on the British Property Federation’s website: “Nobody wants to see good businesses fail, particularly responsible landlords who have invested, either through capital expenditure or rent concessions, in those businesses, and are focused on creating thriving retail locations for the long term. This proposal is a practical solution, with the interests of all parties at its heart. By separating historical rents owed from future rents, this will provide a pathway back to normal market conditions that will help drive economic recovery from COVID-19.”
Simon Carter, Chief Executive, British Land, added: “We believe this is an equitable way forward for property owners and their customers as we start to emerge from the pandemic and the UK economy opens up. Difficult problems require compromise on all sides, and our proposal recognises and addresses the challenges the property, retail, hospitality and leisure sectors have faced over the past year. Looking ahead, the priority must be a move towards more normal market arrangements, while recognising that arrears will take time to work through and require cooperation from all parties”.
Melanie Leech, Chief Executive, British Property Federation, said: “The majority of property owners have already reached agreement with their tenants, providing millions of pounds of support to those tenants hardest hit by Covid-19. However, as public health restrictions ease and consumer confidence and spending continues to grow, we now need to find a fair solution to resolve the discussions that are stalled so that all parties can focus on the future.
“This proposal addresses this head on, ring-fencing historic rental debt – giving businesses more time to get back up onto their feet and to agree with property owners how much of their rent debt they can afford to pay – while ensuring we can reinstate rent payments moving forward. A return to normal market conditions is vital for the millions of pensioners and savers invested in commercial property, and will enable property owners to make investment decisions today that will underpin new regeneration across the country, creating new jobs and fit-for-purpose town centres, and supporting our nation’s COVID-19 recovery.”
In terms of managing rent arrears, the parties are adamant that merely wiping out historic rents would cause more trouble than finding agreement on payments. They say it is a superficially attractive but unviable solution.
Firstly it points to the businesses who have paid in full throughout the pandemic – adopting the government’s principle of ‘those that can pay, should pay’. It says a blanket write-off would penalise
them for good behaviour and engagement.At the same time several similar scale well-capitalised businesses have refused to engage throughout they say, and a write-off would benefit them and likely lead to legal challenge.
Separately setting the criteria for a blanket write-off would be problematic and likely to lead to multiple, complex legal challenges, they argue. For instance, they point out that defining what is a small landlord or a small occupier is clouded by the number of special purpose vehicles that have been developed which would allow landlords or occupiers to present as smaller businesses than they are.
The solution calls for a clear guideline for negotiation and a clear backstop to negotiation that would penalise those who did not “engage in good faith” then.
This would be based on the Code of Practice already put in place, but one that has been enhanced to give more specific guidelines for negotiation between landlords and occupiers to speed up negotiation and resolution.
They flag a number of proposed enhancements. For example where a business is unable to pay and has been unable to trade from their premises specifically because of legislation prohibiting operation through specific lockdown periods, landlords and occupiers should, it says, aim to share costs on an approximately 50-50 basis by reducing rent for that period by 50%. The final outcome should also be informed by the relative scale of the two businesses with genuine through costs such as insurance and service charge paid in full.
What is clear is that the solution is not being set up as a statutory deferment of payment obligations, but simply extends out the current restrictions on the use of statutory demands, winding up petitions, and forfeiture.
It says debt action through the courts is still available and considered appropriate because it can proceed with judicial oversight. In order to prevent aged debt from getting much larger, late payment interest will be capped at 3% for arrears from 25 March 2020 to June 2021 under the proposals. In return, it says a statutory limit on compromising arrears through insolvency processes (such as CVAs and Restructuring Plans) should be applied as an incentive against a surge of insolvencies to clear the debts even where landlords have negotiated concessions in good faith.
It says while not contingent the role of lenders will be important to support landlords as they work with their customers to manage arrears and there is a “clear role for government to play to ensure this happens”.
The full proposals can be viewed here.