Rebecca Campbell argues that all interests need to be listened to when charting a roadmap out of the forfeiture moratorium imposed in response to the coronavirus pandemic.
The initial three-month forfeiture moratorium, announced by the government in March 2020 and implemented by the Coronavirus Act 2020, has snowballed into a 15-month moratorium with no clear roadmap for landlords and tenants on how it will be lifted.
As each extension of the moratorium has been announced, secretary of state for housing, communities and local government Robert Jenrick has repeatedly stated that measures are necessary to “protect those commercial tenants who are unable to pay rent from eviction so that businesses have the security they need to plan for their futures”.
Unfortunately, the further extension of the moratorium to 30 June 2021 did not address the stark reality. The UK now has commercial rent arrears of more than £5bn. The length of the moratorium and the repeated last-minute extensions have clearly exacerbated this problem. This mountain of debt is not just a “landlord versus tenant” issue; it is a major concern for all stakeholders in the property industry.
The public, through charities, local authorities and institutional investors, ultimately owns around 36% of UK retail real estate. Property must be recognised as an independent business that fundamentally underpins the public’s pensions, insurance cover and investments. While the moratorium has been effective in preventing evictions and preserving businesses in genuine distress as a consequence of the pandemic, it has also enabled some opportunistic tenants to withhold rent – an unintended consequence that has hit the public purse much harder than the government may have initially expected.
The government has had 12 months to consider how to tackle the issue. In June 2020, the Code of Conduct was published setting out desired conduct for landlords and tenants. However, it did not have any force in law. It was a reflection of good market practice, but it did not drive market practice.
On 6 April, the government launched its “call for evidence”, which it states is designed to support and inform its decision-making on the best way to withdraw or replace the moratorium. Although better late than never, the online survey is only open until 4 May, leaving respondents with a short window to provide evidence of how they have been affected financially by the current measures – evidence that the government could and should have been gathering throughout the pandemic.
What might happen if the moratorium is lifted in June?
The landlord community has shared the burden and sought to support tenants during the pandemic by offering rent concessions and payment plans. However, frustration has been mounting. Tenants have received a wide package of financial support from the government, including loans and critical business rates reliefs. Yet landlords have received very little and still face 100% empty rates liability if they cannot relet commercial premises promptly. The government has not provided any protection to landlords from enforcement by lenders of their banking commitments, despite lender support being critical to enabling many landlords to offer concessions to struggling tenants.
Landlords on the whole are unlikely to seek to forfeit leases en masse once the moratorium is lifted, particularly in retail and hospitality where there is little demand from new tenants.
A bigger risk is that tenants, without the protection of the moratorium, may decide simply to hand back the keys or opt for insolvency, leaving even more empty properties on the UK high street and putting more jobs at risk.
How could the government manage the lifting of the moratorium effectively?
Landlords and tenants are aligned on the need for a clear roadmap to enable them to plan for a post-pandemic recovery.
Unfortunately, and to the frustration of both landlords and tenants, it has taken the government several weeks to actually launch the call for evidence first announced on 10 March. The online survey presents six options for possible exit routes out of the moratorium, ranging from removing some or all of the current measures to imposing binding non-judicial adjudication on parties. It also suggests remedies available to an adjudicator which include orders to extend and reduce the term of a lease; reset the rent; and change obligations in rent deposit deeds. These remedies do not promote collaboration and give rise to potential unforeseen consequences for the wider property market in allowing underlying private contracts between parties to be fundamentally altered.
Managing the lifting of the moratorium
A phased plan designed to protect the hardest-hit tenants, particularly those forced to close and unable to operate online during the pandemic, would be sensible.
To ensure fairness, any measures imposed by the government should be coupled with a clear and enforceable obligation on those tenants that can meet their financial liabilities to commit to making payments. While the Code of Conduct indicated best practice, it did not have any meaningful impact on reducing the mountain of arrears.
An option to ring-fence Covid rent arrears accrued during the moratorium would have been helpful for landlords. This would have provided a further incentive to work with tenants to agree payment plans, without risk of debts simply being written off if the tenant later resorts to insolvency.
A practical suggestion could be to require tenants to provide landlords with at least three years of financial information to facilitate a fair assessment of the impact of the pandemic on their businesses. This would also help landlords justify to shareholders and stakeholders the need for ongoing concessions while businesses rebuild and recover from the pandemic.
Ultimately, government policy must recognise that the commercial rent arrears crisis cannot be solved by taking a “one size fits all” approach. All stakeholders need to be listened to and incentivised to work together to chart a roadmap that provides for a long-term sustainable recovery.
Respond to the call for evidence >>
Rebecca Campbell is a partner in the real estate disputes group at BCLP
