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Coronavirus: how are commercial landlords balancing rent demands with their tenants' lack of cash flow?

3-minute read

Lauren Hellicar

23 April 2020

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At the end of March, the government announced measures to stop businesses being evicted from their premises during the coronavirus pandemic. This is having a knock-on effect on commercial landlords – how can they balance their own books while tenants can't bring in cash?

With tenants having little (or no) money coming in to their businesses, commercial landlords have been placed in a difficult position.

As reported in the Financial Times, estate agency Knight Frank said: “UK landlords were due approximately £2.5bn in quarterly retail rent last week, according to the British Property Federation. But they received just a third of that.”

A difficult balancing act

Commercial landlords need rent money to keep their own businesses afloat. However, they also need tenants' businesses to still be standing when the government begins relaxing the restrictions.

The Financial Times suggests that one in five retail premises could be vacant in the coming months.

Legal protection for commercial tenants

The government announced that “no business will be forced out of their premises if they miss a payment in the next 3 months”. This measure is intended for tenants who can’t pay their rent because of coronavirus.

Mike Cherry, National Chair of the Federation of Small Businesses said: “We know sensible conversations between landlords and commercial tenants are taking place – but having this legislative backstop to prevent evictions during the worst of the crisis will provide much needed peace of mind for many small businesses.”

How are commercial landlords managing rent demands during the pandemic?

With clear government guidelines for those paying rent, what can commercial landlords do to protect their own interests while acknowledging the difficult situations many of their tenants face?

Sharing or easing the financial burden

It’s a difficult balancing act for commercial landlords – protect your own cash flow, or make sure tenants' businesses survive the lockdown.

UK-based property company, British Land, took a financial hit of around £3 million to waive the quarter’s rent for its small business tenants. Elsewhere, in line with government encouragement to open up dialogue, some landlords and tenants are agreeing to share the financial burden being caused by the mandatory closing of business premises.

One Australian-based commercial landlord has come up with an innovative approach that works for both parties.

Rob Evans is the founder of Australian rope access training company, Graviteq. He pays a percentage of his income as rent to his commercial landlord each month. This way, while his landlord gets a bit less rent during downtimes, he receives higher rent when business is good for Rob.

If you think this approach could work for you and your commercial tenant, consider working out a long-term lease that allows you to recoup the low rent you receive now with higher rent when the economy bounces back.

Reminding tenants it's a rent deferral, not a rent holiday

Intu owns the Trafford Centre in Manchester – the Financial Times reports that it’s in nearly £5 billion of debt and was already trying to raise emergency cash before the pandemic. It’s dealing with the issue by reminding tenants that even though the government has said they can defer rent payment, they’re still legally obliged to pay it at the end of the deferral period.

Stephen Springham, Head of Retail at Knight Frank, noted: “Sympathies tend to side with retailers, but landlords are having a tough time too.

“Intu have their own difficulties, they are in dire straits and their survival will depend on rent. There’s no right answer — these are desperate times.”

Serving demands on tenants exploiting the crisis

Despite receiving less than 30 per cent of its rent for the quarter, UK property owner, Criterion Capital, is choosing to serve statutory demands only on established businesses that they say have “chosen to blatantly use the government’s coronavirus bill as an excuse to withhold paying rent”.

“We are driven to take such action because we are a business that has an obligation to our lenders, to collect rent and meet their demands for interest payment to be made on time . . . The property industry is being treated as the nation’s bank.”

How should commercial landlords deal with non-payment of rent?

Whether you go with one of the options above or come up with a different way to handle the situation, opening up a conversation with your tenant about the struggle you're both facing appears to be an important first step. It allows for understanding of each other's position and a chance to negotiate a way forward.

It's also a good idea to seek legal advice to make sure you're staying on the right side of the law with any action you're taking that affects your tenant or lease agreement.

How are you managing your tenant relations if they can’t pay due to coronavirus? Let us know in the comments section.

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We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer

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