When the second English lockdown hit last month, leisure and retail landlord Adam Coffer told one of his tenants, the owner of a nail salon, to stop paying rent. She had dutifully kept up payments since the coronavirus first forced the country into lockdown in March. He pointed out that she’d struggled through the year with patchy sales and urged her to let his property company, EPF, waive half the final quarter’s rent and defer the other half. When they agreed, she started crying and said: “I didn’t know landlords could be kind like that.”
Neither, apparently, did the government. The property industry has been collateral damage this year as ministers have sought to limit job losses in retail and hospitality by banning commercial landlords from evicting tenants, in effect allowing those less solvent or scrupulous than Coffer’s salon operator to avoid paying rent. It will be a cold Christmas for property owners, with rent arrears estimated to stand at £4.5bn by the end of the year.
The pain has been compounded by the government’s refusal to extend business rates relief to landlords, meaning those stung when tenants collapse into administration are stung again by empty rates bills. And even before this annus horribilis – which, to be fair, has inflicted terrible losses on a wide range of sectors –landlords were suffering under a tidal wave of CVAs.
The property industry has allowed itself to be cast as Scrooge over the years and is now paying the price. The British Property Federation and the Royal Institute of Chartered Surveyors, two bodies that might have been expected to stand up for its interests, have either failed to do so or have not got their messages across effectively. Unless it finds a stronger voice, property, and the pension savers that comprise its investors, will continue to be penalised. In the longer term, if leases are seen to be optional, the sector could even become uninvestable – with big implications for the regeneration of towns and cities.
Sir John Ritblat, the developer who built British Land, reckons property’s “slightly dubious reputation” can be traced to the scandal that surfaced after the death of slum landlord Peter Rachman in 1963, followed by the sector’s role in the secondary banking crisis of 1973-1975. But an innovation dating to an earlier time has arguably been the real source of strife between landlords and tenants in recent years: the upward-only rent review, conceived by George Bridge of Legal & General and Eric Young of the National Coal Board Pension Fund in 1955.
For decades, owning prime (and even good secondary) property was a lucrative game. In the good years, fuelled by expectations of growing consumer spending, retail and leisure tenants were prepared to sign long leases with upward-only rent increases. And in the cases of chains such as Debenhams, which was asset-stripped by private equity between 2003 and 2006, generous sale-and-leasebacks were a way of releasing immense short-term value for financial investors.
That hit the buffers in the 2008 financial crisis. Lease lengths have been getting shorter since then: in 2016, leases of six to ten years accounted for 55% of deals signed by retail and leisure tenants, according to Savills. By 2020 that had more than halved, and in the next two years, 90% of new leases are expected to be shorter than five years. That still hasn’t helped tenants locked into older leases.
In 2018, the dam broke, unleashing a wave of CVAs. Landlords argued, rightly, that tenants – especially those backed by private equity – had been perfectly willing to bid up the value of leases in the best locations when it suited them. Yet plenty of tenants –helped by big accounting rms such as Deloitte and KPMG –bought into the counterargument articulated by early Pizza Express backer Luke Johnson: “Landlords deserve absolutely no sympathy. They are mostly ruthless when it comes to rent reviews, dilapidation claims and service charges. Why on earth should tenants not use every legal means – as landlords do as a matter of course – to improve their commercial position.”
I was surprised then at how the property industry, with some laudable exceptions, acquiesced in this reckoning. The BPF objected to some individual CVAs but never successfully made the wider point with government that, in many cases, the dicewere being loaded against landlords: their CVA voting rights were being watered down through reductions in the future value of their claims by 50-75%, and in some cases other unsecured creditors were being allowed to vote, too. Coffer describes this as like asking turkeys to vote for Christmas – then giving Santa,Mrs Claus and the elves votes of their own.
Given this backdrop, I was less surprised when business secretary Alok Sharma popped up with virtue-signalling measures to “protect the high street from aggressive rent collection” in April. By putting a moratorium on rent enforcement, the government distorted the free market. The recent collapses of EdinburghWoollen Mill and Arcadia show it has not been effective in saving jobs put at risk by lockdowns, but it has severely hampered rent collection, with payment rates of about 40% on retail properties this year.
Again, with the exception of voices such as that of Alton Towers landlord Nick Leslau, who called the government’s approach “narrow-minded”, the industry has failed to convey the message that legalising non-payment of rent puts jobs at risk elsewhere, damages pension savers’ returns – and could in time undermine the sector’s investability. That matters for society: Argent’s regeneration of King’s Cross in north London and Paradise Circusin Birmingham are examples of how property can be about creation as well as income collection.
The BPF is obviously aware of this – its president happens to be David Partridge, Argent’s senior partner. Yet perhaps because it speaks for a broad and varied constituency, it tends to err on the side of blandness and caution. Someone who has worked with it also points out the BPF has traditionally been dominated by figures from the REITs who have been more concerned with keeping their tax advantages than pushing for radical change.
Melanie Leech, the BPF’s chief executive, says it is in an “ongoing conversation” with ministers about how and when to lift the “incredibly crude” rent collection moratorium. She says it has been successful in lobbying for landlords’ voting rights to be reduced by as little as 25% in some CVAs, and that it is pushing for mandatory independent oversight of CVAs –although she admits the government has “not yet responded” to the BPF’s pressure on empty rates. More broadly, she says, the BPF has reinforced the message with Whitehall that property can play an important part in rebuilding the economy after COVID-19 and adds: “The feedback we get from our members is very positive.”
The fact the moratorium stays in place, and that contentious CVAs keep coming – such as the one pushed through by Caffe Nero last week – shows it’s not enough. Compare the performance of the BPF or the directionless RICS with a lobby group such as UKHospitality, which has loudly and affectively banged the drum for pubs and restaurants. The philosopher Joseph de Maistre once said that nations get the governments they deserve. If the property industry deserves better than the treatment it’s getting from Sharma and friends – and I believe it does – then it needs to find the brains and guts to argue why.