Unsurprisingly, the property investment market has been badly affected by the Covid-19 pandemic. It is not the virus itself which has, certainly in the short term, damaged the market, but the measures that the Government has introduced to limit the economic consequences of the virus.
In March of this year, the Government introduced moratoria on the institution of forfeiture or insolvency proceedings by landlords to recover rent (together with similar restrictions on the exercise of the right to confiscate and sell tenant’s assets in settlement of unpaid rent). In the short to medium term, the moratoria are having an effect on landlords who are growing increasingly restive. From their perspective the moratoria have given to tenants, in all but name, a charter not to pay rent.
The moratoria make no distinction between those tenants who are capable of paying rent and those whose businesses have been so badly affected by the consequences of the pandemic that they cannot pay their rent. To an extent the former class of tenants have been able to a degree to operate in an economically viable fashion, whereas the latter group are generally unable to operate at all. Critics of the moratoria also point out that some tenants seem also to be profiting from the moratoria by distributing their profits whilst continuing to withhold their rental payments.
In practice, landlords have two choices if tenants are not paying rent, either:
+ To wait until the moratoria are lifted and, then, immediately by threat of forfeiture and/or insolvency proceedings, seek to recover the unpaid rent; or
+ To offer temporary concessions to tenants by agreeing to grant rent free periods or reducing rents for an agreed time.
Increasingly, landlords are agreeing to forgive rent arrears and/or reduce rents in return for their tenants agreeing to resume paying some rent. This has evolved into the default position for smaller private landlords, typically family trusts and charities. Many of these types of investor will have committed capital in acquiring commercial property let to tenants with strong covenants, such as national retailers. The disparity between the resources of such ‘institutional’ tenants and private individuals has been illustrated by the demands made of their landlords to agree terms on which rental payments are resumed. Usually the requirement is that the rent be reduced. More radically, and sometimes in conjunction with seeking a rent reduction, some tenants have mounted concerted campaigns to have their existing lease terms restructured by replacing fixed rents with a rent based, at least in part, on turnover.
Conversely tenants unable to pay rent by reason of the economic consequences of the pandemic have encountered difficulties in obtaining assistance from their landlords. In particular institutional landlords, who constitute the majority of the owners of commercial property, have sought to extract longer term commitments from their tenants in agreeing concessions. An example of this is requiring a tenant to extend the term of a lease (coupled in some cases with an upward review of rent at the beginning of that extension) in exchange for an agreement to reduce rent for a period of time.
That the property investment market will emerge changed from the pandemic is certain, but the extent of change is uncertain. However, investors should not make short-term decisions to address the issues caused by the pandemic which will materially affect their property assets in the future. Ultimately, it should be remembered that similar, if less seismic, crises in 1973, the early 1990’s late 2000’s were all encountered and, by and large, survived by the property industry.
Peter Robinson is a partner at Hunters Law LLP.