The end of the commercial rent moratorium: avoiding the chaos

The end of the commercial rent moratorium on 30 June 2021 is fast approaching and with many businesses in the hospitality sectors hanging on by a thread and thousands of jobs at stake, it has the potential to be chaos. Despite this, many commercial landlords and tenants are yet to come to a clear agreement on how their leases will work moving forward.  

The government extended the ban on commercial rent evictions to support the businesses which were hardest hit by the pandemic and therefore unable to pay their rent. This support was largely aimed at the hospitality and leisure sectors, which had to bear the brunt of some of the toughest Covid-19 restrictions and racked up some hefty bills (as well as lost income) as a result. Landlords are obviously feeling a significant pinch with huge sums of rent remaining unpaid.

Even with the re-opening of stores, businesses are still faced with added costs of implementing necessary Covid safety measures. Low footfall (particularly in larger towns and cities as people continue to work from home), tied with having to operate under reduced capacity, is massively impacting businesses in the hospitality and leisure sectors which are battling rent debts. 

This is creating a huge amount of tension between landlords and tenants who are going head-to-head in the lead up to 1 July. In reality, landlords and tenants need to work with each other instead of against, to negotiate mutually beneficial agreements. 

What can landlords and tenants do to avert 1 July chaos?

Commercial landlords and tenants who haven’t discussed the resuming of commercial rents as of 1 July need to come to the table, fast. Both parties must work collaboratively to understand each other’s business situation and the impact the pandemic has had, to establish whether existing lease agreements will work and how best to move forward. Transparency is key, and landlords won’t be sympathetic with commercial tenants that exaggerate their financial struggles.

Recommended measures that could suit both parties could include: 

• Rent forgiveness / write-off to ensure rents can continue to be met

• Changing payment structures (e.g. moving to a revenue based rent model or blended rent model based partly on traditional fixed rent and partly on revenue)
• Tenants allowing landlords to take units back if they have alternative tenancy / occupier options – this could be mutually beneficial if the tenant wants to scale down its property portfolio

Vultures circling over golden eggs ahead of 1 July

A lot of retail and leisure businesses that have remained strong throughout the pandemic will be looking to take advantage of commercial tenants in weaker positions by swooping in, making better offers to landlords and taking prime units.

This is likely to take place in traditional strong retail locations, but also in key asset classes such as drive-through restaurants and roadside retail, which continue to be in massive demand. Warding off these businesses will be tough, so tenants need to be extra careful to ensure they are fulfilling their contractual obligations with their landlords, not least with regards to paying their rent. 

For would-be occupiers looking to seize these opportunities, they can help secure prized units by close collaboration with the landlord and even assisting with funding and strategies for securing the removal of the previous tenant.  

Shifting the balance of power

Government support to commercial tenants over the past year has put tenants in a protective bubble, but that evaporates on 1 July, when landlords will be able to exert their rights under leases for non-payment of rents.

Many landlords have displayed great pragmatism and understanding; acknowledging that this was not a time to turn their back on tenants, particularly those who are typically very reliable. Landlords will need to think long-term as well as short-term, and value successful tenants that will provide them income for a sustained period of time. 

Ultimately, landlords want tenants that will consistently bring in business - it’s no use to them having empty properties that won’t generate any income. Therefore, being flexible when negotiating agreements is in their best interest, and in many cases, landlords will be willing to agreed revised terms with a reliable tenant with sustainable business prospects.

What happens next? 

The government is currently assessing information from a recent call to evidence that looks at whether landlords and tenants have been having productive discussions around their lease agreements. If the evidence shows that they haven’t, the government may be forced to intervene to safeguard hospitality sector occupiers. As a result, we may see support measures extended, for example through a phasing out of the rent moratorium, or perhaps even new measures introduced.

Landlords are better off in the first instance trying to come to agreements with their tenant, as government intervention may only delay rent payments further. The British Property Federation estimated that if the rent moratorium is extended, and the current rate of rent non-payment continues (mostly within the hospitality and retail sectors), the total amount of unpaid rent for UK commercial property over the past year could be up to £7 billion. 

Both commercial landlords and tenants have a key role to play in ensuring the survival of the hospitality sector. And whilst time is ticking, it’s still not too late for these deals to be made. 

This article was first published by CLH News 

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2021. Specific advice should be sought for specific cases. For more information see our terms and conditions.