Commercial property: Where do we stand with rent payments?

Commercial property: Where do we stand with rent payments?

In just a few weeks, on the 24th June, the next quarterly rent payment for most commercial tenants will be due to landlords. In this note, we take a look at who did and who didn’t pay their rent last quarter, at the likelihood that landlords will receive rent this quarter, and at the outlook for landlords and tenants under the current lockdown. We also examine a new government proposed code of conduct for landlords and tenants regarding rent negotiations, announced last week.

In England and Wales, most commercial rents are payable quarterly in advance on four ‘quarter days’ which have been the same for centuries. In the previous quarter, when rent was due on the 25th March, many businesses had just been struck by the coronavirus lockdown. Some tenants paid their rent, some negotiated (or tried to negotiate) a rent reduction or deferral, and others simply did not pay their rent, either because they could not or because they wanted to conserve cash flow.

The March Quarter

In the 2020 March quarter, landlords experienced a significant curtailment in the collection of rent. Based on a number of company and industry reports we estimate that commercial landlords overall only received 60-70% of the rent due. However, this varied considerably across sectors.
For example, a report from Statista (1) stated that Landsec had collected 86% of its office rents, 41% of its retail rents and just 23% of specialist rents, 5 days after the quarter. This compares with 91-98% at the same time in the 2019 March quarter.

Another report by Re-Leased (2) , covering over 10,000 properties and 35,000 leases, suggests that after 12 days 62% of office rents had been paid (usually 68%), 50% of industrial rents (75%), and 48% of retail rents (77%). In warehousing and distribution, the landlord SEGRO (3) reported that it had only collected 71% of rents on the due date, compared with 96% at the equivalent stage in 2019, and that around 25% was subject to reprofiling discussions.

Landlord & tenant Law: CRAR delayed, forfeiture banned

Normally, if landlords are owed just 7 days of rent, they can exercise commercial rent arrears recovery (CRAR), with landlords typically being able to forfeit (terminate) the lease, gain peaceable re-entry, and allow seizure and sale of goods. This is a statutory procedure which came in to force in 2014. However, as we reported in April, the government has extended the CRAR grace period for payment to 90 days and prevented forfeiture altogether, for non-payment of rent by a business tenant during the period from the 26th March until the 30th June 2020 (the ‘Relevant Period’). The government could yet extend the Relevant Period.

Previously, another tool for commercial landlords looking to recover rent arrears was the threat of insolvency action. However, as we reported in May, the government has also published emergency legislation on insolvency which will reduce the landlord’s remedies available retrospectively. To help troubled businesses, it allows companies to be restructured and still trade and obtain supplies, without the threat of insolvency proceedings; and for directors to take difficult decisions in good faith to pay employees and suppliers without the risk of personal liability during the Relevant Period.

All of this represents a significant curtailment of landlord’s powers to recover unpaid rent.

The 2020 June quarter

Reports suggest that a number of large retailers continue to refuse to pay rent and many are trying to negotiate for large reductions, rental agreements linked to turnover, and cuts to service charges due to the current lockdown. In a recent webinar, Andy Pyle, Head of UK Real Estate at KPMG stated that the consensus is for 2020 June quarter rent payments to be lower than in March. This is because businesses have now experienced a full quarter of lockdown and because of the government stopping landlords taking effective debt recovery action against tenants. It is suggested that there will be a further 10% fall in rental payment collection.

Also, for many businesses, particularly those in the hospitality sector, there is still significant uncertainty. Some businesses may have a clearer idea of their business prospects as the planned easing of the lockdown continues, but they may still be financially distressed. It is suggested that up to 20% of small businesses may eventually become insolvent.

At the same time many businesses will now be benefiting from the support schemes implemented by the government, including furloughing, waiver of business rates, small business grants, and bounceback loans schemes. Larger companies have also been strengthening their balance sheets through various financing options where possible. These steps could allow many businesses not contemplating insolvency to pay some or all of their rents in the 2020 June quarter.

However, the effects of the coronavirus are unlikely to be a two-quarter event. Landlords and tenants should consider the impacts of unpaid rents over a longer period.

Longer term considerations

Many businesses were running on tight margins before Covid-19. There is no escaping the fact that some will become insolvent, that at some point repossessions of properties are likely to become more widespread, and that the letting landscape will change. Businesses will also be reviewing their operating models.

Office tenants will start to look at the ‘beneficial use’ of their existing offices and adapting to increased levels of remote working, which could reduce their need for office space, or at least change their office mix to include more flexible and short-term space.

Retail tenants will be looking at the viability of each of their stores as they face operating issues and lower turnover, initially owing to social distancing and likely lower footfall, and then because of the recessionary and unemployment impacts on trading that seem likely to follow. They may also step up their on-line business, following the increased familiarity with online shopping, which could also hasten the reduction in required retail space.

Some enterprises, such as supermarkets and industrials, are likely to be relatively unaffected, but it is clear that the demand for shops, offices, and warehouses will be reduced in the medium term. The consequence, we believe, is that market rents will fall.

Unless landlords own prime premises that will find tenants in any market, they are going to have to assess whether it makes good business sense to ignore the commercial realities that tenants are facing. Retaining an existing customer is cheaper than finding a new one, especially in a market where demand is falling.

Rents are still due

The concessions made by the government should give businesses some breathing space, but at the cost of landlords having had to share some of the burden, at least temporarily. Although landlords are urged to give their tenants breathing space and avoid ‘aggressive rent collection’, the government is also asking tenants to pay rent (or at least part of it) where they can afford it in recognition of the strains felt by commercial landlords.

Tenants must also face the reality of the situation. Ultimately, they will have to pay their rent or face the consequences. The emergency legislation does not change that. It has not created a rent-free period (although some tenants have taken the opportunity to negotiate one). Once the Relevant Period has expired (even if it is extended), a tenant that has not paid all of its rent and any interest due, including for that period, may face CRAR and forfeiture action.

Indeed, for tenants who did not pay the 2020 March quarterly rent and decide not to pay the 2020 June quarterly rent, and who have had a CRAR notice served on them, they may find that the 90-day period runs out, leaving them exposed. Also, the Act does not restrict forfeiture actions for other reasons.

For landlords, there are still some other approaches to apply pressure on tenants such as initiating court proceedings for a money judgment (CCJ); making a claim for the rent against a guarantor or rent deposit; or issuing a rent diversion notice. However, it is likely that pursuing coronavirus-related disputes in the coming months, while we are still coming out of lockdown, risks at least some damage to their reputation, and quite possibly some form of regulatory intervention.

Meanwhile, some landlords also remain at financial risk. By way of example, shopping centre landlord intu has already acknowledged that it will breach its upcoming debt covenants after it received less than one-third of quarterly rent payments, and that it is seeking standstill-based agreements with relevant financial stakeholders (4).

New government code of practice

On the 29th May 2020, the government announced that it plans to publish a code of practice to assist discussions between high street businesses and landlords over rental payments for the 2020 June quarter. It is expected to provide guidance on dealing with rent arrears. This code could be made mandatory if the government considers it necessary, and it can be seen as a first step towards government intervention. It is expected to be published before the next quarterly rent payment date of the 24th June 2020.

We expect the code to create a sensible and realistic schedule for collection of rent arrears. Of course, many landlords and tenants have already been in discussions about rent payment holidays, rent reductions, phased payments, and other alternative payment arrangements for the coming quarter. Where this has not happened, we would advise landlords and tenants to open (or re-open) discussions as soon as possible for their mutual interests.

That is not to say that the picture is all division and confrontation. Many landlords and tenants have approached these unprecedented circumstances in a spirit of mutual understanding and compromise, agreeing temporary solutions to see both parties through the current period. Most have a good working relationship and have found a fair and reasonable settlement. Landlords are trying to assess the business prospects of their customers, although the data is limited, and one important factor is the amount of rent costs seen as a percentage of turnover. This varies across the sectors: for retail, for example, it is often high, whereas for many industrial businesses it is relatively small.

Rent relief documentation

While an immediate way through may have been reached already for many commercial landlords and tenants, if it is not properly recorded it may rebound. Tenants should be concerned that it may not be enforceable, landlords should be concerned that it may have the effect of compromising the lease itself. The parties may unwittingly be storing up consequences further down the line once we are all out of the current situation.

Terminology can be confusing, and it is possible to misinterpret what has been requested or offered. It is critical that property managers and both tenants and landlords understand the terminology being used. The form of rent relief being requested or offered should be clarified in writing. Once agreement has been reached, both parties need to be clear on exactly what relief has been agreed. (and indeed, on whether it is intended to be unilateral and ‘ex gratia’). We recommend that any agreement reached is properly documented.

We are not suggesting that there needs to be any reopening of agreements, but if you would like us to look at any agreement already reached and to summarise that into a side letter or simple lease variation that both parties can sign and rely on (and to point out any issues that might be in danger of arising) then we are happy to do so.

If you require advice on the above issues or any real estate, insolvency or disputed debt matters, please contact:

Edward Jones Mobile: 07876 255398 Email: edward@eml.legal
Jeff White Mobile: 07807 131216 Email: jeff@eml.legal
Sandra Rankine Mobile: 07725 407685 Email: sandra@eml.legal

Elliott Matthew Property Lawyers - Tel: 020 3585 1945. Fax: 020 3137 7190. DX: 44625 MAYFAIR. 10 Margaret Street, Fitzrovia, London, W1W 8RL

This note was written on 2nd June 2020. This content is provided free of charge for information purposes only. Events are moving fast, and the law and its interpretation are changing rapidly. This note does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by the author or Elliott Matthew Ltd.

Sources
1. Statista. Share of commercial rent collected in March 2020. [Online] https://www.statista.com/stati....

2. Re-Leased. COVID-19 Rent collection impact report. [Online] https://global.re-leased.com/c....

3. SEGRO. Statement on Covid-19. [Online] https://www.segro.com/media/pr....

4. intu. Update on lender discussions. [Online] https://www.intugroup.co.uk/en....

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