The end of the commercial rent moratorium?

Simon Toseland, a Director of Prop-Search

The real estate sector has undoubtedly suffered through the Covid-19 pandemic with the Government’s suspension of much of the legislative framework for meaningful enforcement of rent arrears. But as the UK moves towards the easing of the third lockdown and the end of tenant protections that were introduced by the Coronavirus Act 2020, commercial property agent Prop-Search asks how rent payments to landlords will be unlocked.

The current measures suspend the ability of landlords to exercise a right of forfeiture for non-payment of rent against a business tenant and restrict the use of Commercial Rent Arrears Recovery. Alongside these statutory measures, a new voluntary Code of Practice for commercial lettings was introduced, which encouraged greater cooperation between landlords and tenants by looking for flexibility around rent payments.

It is estimated by the Royal Institution of Chartered Surveyors (RICS) that £6 billion is owed to commercial property landlords as a result of the pandemic.

Simon Toseland, a Director of Prop-Search, said: “The current end date of 30 June 2021 for certain Covid-19 reliefs is however fast approaching and without any further Government intervention, landlords will be entitled to pursue accumulated rent arrears by forfeiture and use the commercial rent arrears recovery procedure.”

The Government did launch a call for evidence on commercial rents to help monitor the overall progress of negotiations between tenants and landlords, with a view to setting out steps that Government could take after 30 June. These ranged from a phased withdrawal of current protections, to legislative options targeted at those businesses most impacted by Covid-19. However, whilst the consultation has now closed, the Government is yet to announce any plans for an extension or gradual easing of these reliefs.

The RICS considers that the existing measures on the commercial rent moratorium should be maintained for a limited period – perhaps until the end of the year – with future protections specifically targeted at those small business tenants whose businesses have been directly affected by lockdown restrictions. However, in order to aid transparency, any tenant seeking rent reduction or abatement should provide – in confidence – all financial information that their landlord may reasonably require in order to make a fair assessment. Landlords should then offer terms subject to the presentation of evidence about the tenant’s inability to pay.

Other proposals put forward by respondents to the consultation also suggest that rental arrears owed from March 2020 to June 2021 should be ring fenced until 31 December 2021, by which time either an agreement on rental arrears must be reached between landlords and tenants, or the dispute will be settled by binding adjudication.

Simon Toseland, concludes: “A phased and targeted approach between landlords and tenants is most appropriate in our view.”

“There is evidence that the moratoria forced landlords and tenants to open useful dialogue in order to deal with the issue of arrears brought about by the pandemic. We believe that where rent negotiations are taking place and where tenants’ businesses have been impacted by the pandemic, an agreed longer duration to pay off any arrears could be offered.”

He adds; “However, there are also indications that the moratoria alone, without a clear, signposted, Government-supported and calibrated exit strategy, has polarised the relationship between landlord and tenant over the issue of pandemic induced leasehold debt.”

Prop-Search also considers that despite the pandemic, trade and demand within certain sectors has actually increased significantly; in terms of B class space, occupier demand is now easily exceeding stock availability. This one factor alone is driving significant increases in capital values and occupational rents and as such, there could be some situations where repossession of a property would allow for a landlord to re-let or sell at a higher market figure. So not only could tenants be under pressure to repay unpaid rent, but they might also find themselves evicted to make way for a better deal.