By Jack Sidders
British businesses ravaged by the pandemic skipped more than 4 billion pounds ($5.5 billion) in rent last year. With the bill coming due, a battle over sharing the pain is heating up.
Landlords, acknowledging the damage wrought by almost a year of enforced closures and depleted foot traffic, are demanding lenders bear some burden as about one-fifth of commercial rent is behind. Regulators are urging banks to avoid taking a hard line. Retailers and restaurateurs, hammered by the deepest recession in three centuries, say the pile of debt isn’t their fault.
While the debate about who ultimately pays for lockdowns is playing out globally, U.K. Chancellor of the Exchequer Rishi Sunak’s initial response -- a property-tax holiday, a furlough program to assist with staff costs and a freeze on evictions -- has set up a stark cliff edge at the end of March.
“The notion that these retailers should be expected to pay 100% of the rent for the periods they have been closed is a little unfair, to put it mildly,” said James Daunt, chief executive officer of bookstore chain Waterstones, which is owned by Paul Singer’s Elliott Management Corp. “It is also unreasonable for the government to be washing their hands of it. I think the government has abrogated its responsibility.”
Likewise, the Property Owners Forum, which represents about 200 U.K. landlords, has written to government agencies pleading for lenders’ forbearance. They want holidays on interest and capital repayments for loans secured against properties where rent hasn’t been paid due to the emergency rules.
Stuck between cash-strapped tenants and demanding lenders, “property owners are the meat in the sandwich,” said Adam Coffer, chairman of the group, which was set up during the pandemic. “You are going to have a huge bottleneck of debt when the moratorium ends and if government extends it, they are just kicking that can down the road.”
The Coronavirus Act passed in March imposed a three-month moratorium on commercial landlords’ ability to evict non-paying tenants. The provisions have been extended repeatedly as the pandemic dragged on, but the government said in December -- before the new strain of the virus took hold -- that the current extension to the end of March would be the last.
About 4.2 billion pounds of the more than 23 billion pounds of commercial rent due in 2020 was unpaid, according to Remit Consulting. More than 5,000 stores closed in the U.K. last year as major retailers including Topshop owner Arcadia Group and department store operator Debenhams Plc collapsed, according to the Centre for Retail Research.
As the latest lockdown drags on, tenants are still struggling. Almost a third of the rent due on Christmas Day for the following three months hadn’t been paid within 21 days, the Remit data show.
Covent Garden landlord Capital & Counties Properties Plc said Tuesday that it collected just 42% of the rent due for the first quarter. The company was forced to slash the value of its estate around London’s tourist hot spot by 27% last year and has had to secure waivers on some agreements with lenders.
While going after tenants that have had little or no income for months on end is unlikely to win landlords friends or fortune, in many cases their decisions will be driven by the approach of their lenders. At stake is the risk that mounting piles of unpaid rent trigger another wave of retailer collapses and loan defaults.
That underscores why the Bank of England urged lenders to “consider carefully their responses to potential breaches of covenants arising directly from the Covid-19 pandemic and its consequences.” The U.K. Ministry for Housing Communities and Local Government didn’t respond to requests for comment.
“We have asked just about every bank the same question about capital and interest repayment holidays and none of them has given a meaningful response,” Kevin Hollinrake, a Conservative member of parliament and co-chair of the All Party Parliamentary Group for Fair Business Banking, said in an interview. “Most landlords are working with tenants to come to sensible arrangements but some of the big chains have behaved very unfairly.”
In contrast, there are signs that lenders have begun amping up pressure on their landlord borrowers as the pandemic heads into year two.
The owners of the Devonshire Square complex in the City of London were forced to inject cash in December to cure a breach of the terms of their mortgage bonds after a private members club on the estate filed for bankruptcy and main tenant WeWork Co. curtailed its expansion plans, according to filings to bondholders.
While securitized loans offer a glimpse into lenders’ approaches as information must be disclosed to bondholders, most U.K. real estate lending remains direct and therefore terms are more opaque. That’s particularly true for the growing array of niche credit funds and alternative lenders.
“The unregulated lenders are simply saying this is not our problem and we are finding that many lenders are now even asking for valuations,” Coffer said. “That’s putting valuers in an impossible situation and further burdening landlords, who have achieved absolutely no grants or government support.”