Real Estate

UK government can’t duck the Covid rent debt challenge


There is a £6bn problem looming in the commercial property market. And the UK government should take a role in sorting it out.

The build-up of commercial rental debt since a moratorium on evictions in March last year is a can that has been repeatedly kicked and ignored. A blunt but necessary tool, the moratorium put the commercial property market on ice. Lockdowns and trading restrictions meant tenants couldn’t pay their rents; landlords couldn’t take any action.

The end of the moratorium on June 30 is an interesting moment. If we are indeed getting “back to normal”, the government doubtless would like to get back to minding its own business, rather than refereeing a multibillion-pound bust-up over private contracts. 

The options in a consultation that ended on Tuesday leaned in that direction: stand back and let the market do its work. But that would be a mistake.

This doesn’t mean the government should stump up its own cash. What both sides agree on is that most landlords and tenants have already struck deals involving rent concessions, or are in the process of negotiating one. Both suggest there is a difficult 10 per cent (on the other side, of course) who are refusing to negotiate, as well as more that have yet to engage at all. A scheme that uses taxpayer money to bring people together risks rewarding the awkward and bloody-minded on both sides.

The suggestion last week from a group of landlords to decouple Covid-19 arrears from rent payments from July was a good one. Re-establishing some market norms could help deal with what Remit Consulting calls “Schrödinger’s tenants”: businesses that may or may not have survived the pandemic but remain in occupation.

Giving landlords some of their powers back should help establish where the new normal actually is. It could even bring some holdouts and chancers to the negotiating table. Rent collections remain at about 70 per cent of what is due after 21 days, according to Remit. That is dragged down by sectors such as leisure and retail. But collection rates in offices and industrial property are also below pre-pandemic levels. 

The quid pro quo should be continuing protection for a sector such as hospitality until it can operate normally. Speed dictated a one-size-fits-all approach last year but the withdrawal of support can be more refined.

Even once indoor dining is permitted, hopefully later this month, table-service-only rules will keep takings to between 60 and 70 per cent of normal levels, according to UK Hospitality. The sector accounted for one in six jobs created after the 2008 recession. And what seems to be a “Roaring Twenties” recovery plan, based on savings and pent-up demand for fun, relies on a thriving hospitality scene — as does the government’s desire to lure people back to offices and resurrect city centres. 

Tackling rent arrears themselves will take a tougher line than the sunshine and rainbows of the current industry code of practice. Other countries have mandated sharing the burden of arrears, with a 50/50 split seeming a reasonable starting place. Landlords who have already written off debts have often negotiated terms in their favour, such as extending tenancies or removing lease breaks. For the tenants, turnover-linked rents or changes to payment schedules could be part of the discussion.

The challenge will be dealing with the unreasonable and the under-resourced, in two industries dominated by small operators. Clear government templates for what an equitable outcome looks like should help the latter. The backstop of mandatory arbitration will be needed to handle the former.

The removal of Covid-19 support will inevitably be painful, causing some business failures, evictions and litigation. And that is a necessary process. But the government has shelled out hundreds of billions to — in its own words — “support businesses and keep people in work”. Managing a careful withdrawal from these markets is part of that job.

helen.thomas@ft.com
@helentbiz





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