Thought Leadership

With another Quarter Rent day approaching – what do we do..catch 22..?

Kerman & Co. website
September 29, 2020 Advisory

Little did we know from the standpoint of the government’s initial announcement of the moratorium on forfeiture for commercial rent arrears, that we would be facing the prospect of entering 2021 before landlords could reclaim the ability to evict for non-payment of rent.

In its original manifestation the moratorium granted tenants an element of peace of mind until 30 June 2020, taking into account the June quarter rental payment date.  Soon enough that was extended to 30 September, sweeping up the next quarter.  But with the easing of the lockdown and the return to something at least beginning to tread the path of normality, it became clear not only that the recovery would be long and slow, but also that the dangers of a return of the pandemic were a real and foreseeable prospect.  In response, the moratorium was extended yet again to 31 December 2020 – so, commercial tenants who genuinely cannot pay their rent are protected from being placed on the street and will not face the prospect of insolvency proceedings forcing them to pay.

In amongst all this the government published its Code of Practice for commercial property relationships during the COVID-19 pandemic.  This was a kind of road-map, good intention directive from HM Government  – seeking, it seems, to place a cuddly arm around two competing interests in the manner of “…come on, let’s all sort this out together…”.  Some tenants have mistaken this for clear licence not to pay their rent even when they can (although the Code is clear in that all who can pay, should pay) and by the same token, some landlords have seen this as the legislature threatening to crack the whip and “…woe betide you landlords if you don’t fall into line…” Clearly good intentioned, but it is probably fair to say that the Code’s attempt to achieve a perfect nirvana does not swing much weight in the harsh realities of the commercial property world.

From a lawyer’s perspective, we have seen a spike in requests from both commercial landlord and tenant clients around each approaching quarter rental date to protect their interests in gathering-in rents or shielding obligations and attempting to renegotiate terms. We have seen several brazen attempts from financially comfortable tenants to simply withhold rent – no doubt in the pure interests of cash flow. Some have been in the style of pre-prepared and printed letters to their landlords boldly proclaiming a policy that “…we shall not pay rent…” end of!  This is a dangerous approach for a tenant who can pay/won’t pay; whilst the moratorium prevents forfeiture of tenancies for non-payment of sums due under the lease, it does not prevent the landlord threatening to take – and indeed taking – court proceedings for recovery of the rent. The problem for a tenant who can pay is that the costs of the landlord instructing its solicitor to take that action are generally recoverable against the tenant under an indemnity provision in the lease. And that’s aside from the contractual interest which will accrue upon the arrears in the meantime.  In short, a sustained resistance to pay could prove false economy for the uninitiated tenant.

So, surveying the landscape as we approach the 29th September 2020 rental quarter date, where exactly do we stand and what does the future look like?  Well, perhaps we are in as precarious position as we were back in March or June – the pandemic is on an upwards trend again and we have a realistic prospect of more severe constraints on retail trade and hospitality.  The government’s Code of Practice envisaged that its edicts would prevail until June 2021.  At the time of publication, that was a striking declaration and one which was perhaps met with a “…surely not…” But as time moves on and reality bites, that is probably a conservative timescale and there may be little surprise if the moratorium is extended in line with that initial vision.  In all of this, commercial landlords are indeed facing something of a “catch 22.”  The moratorium is, to a degree, perhaps something of a red herring because tenants – good tenants – are at a premium.  It is a bold commercial landlord in the current environment who would be willing to sacrifice solidity and reasonable prospect, on the altar of the unknown – and replace the tenant with whom, and at what rent ? (and rent free allowance…?).

Landlords appreciate this; the astute amongst them are finding ways of accommodating their tenants and reaching creative solutions that share the burden and partner their tenants for the sake of at least the prospect of a good future.  But the road is long, and the future is unclear and there is an element – a question – amongst all this as to whether landlords really have a choice?  Perhaps not.  There is likely to be a tipping point – a juncture beyond which landlords simply can no longer shoulder the burden.

As we reach the 29th September quarter rental date we are, perhaps, edging closer to that tipping point. As we travel towards December and the end of the moratorium, the government will face an agonising decision on whether, how and in what way can they find a reasonable and equitable balance between the interests of commercial landlords and tenants.

Originally published at Kermanco.com prior to the firm’s combination with Armstrong Teasdale in early 2021.

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