The increasingly controversial rent moratorium is scheduled to end on June 30, Retail Week looks at proposals being discussed to avoid another high street bloodbath.

Shoppers on a High Street

 

  • Rent moratorium has become source of animosity between landlords and retailers 
  • A proposal advocates different treatment of rent from March 2020 to June 2021
  • Agreement is “70% agreed - but that remaining 30% is important.”

When the first commercial rent moratorium was introduced in late March 2020, for the most part both landlords and retailers agreed it was a necessary measure as the pandemic began.

Designed to stop landlords from pursuing legal action against tenants unable to pay their rents as stores closed during lockdown, sources involved in its creation say the moratorium was - perhaps unsurprisingly - hastily cobbled together.

Drafted against a backdrop of a rapidly escalating health and financial emergency, the moratorium was originally only ever intended as a short-term stopgap. Since then it hasn’t been revised once. 

Nearly 16 months, and three extensions later, the moratorium is scheduled to finally expire on June 30. 

Retail Week spoke with landlords, retailers and industry bodies to find out is being done ahead of the deadline to stop what Boxpark chief executive Roger Wade fears could be “a potential apocalypse event for the high street”.

Battle lines drawn

The once universally agreed measure has become a source of festering animosity between some landlords and retailers

On one side landlords feel that certain occupiers have, in the words on one property agent, “completely taken the piss”. 

Despite the ‘can pay, should pay’ rhetoric from the government, landlords feel many retailers have been using the moratorium as an excuse to divert rent payments into cash reserves and even, in one or two instances, dabble in the M&A market. 

Retailers feel aggrieved that under the moratorium landlords were not banned from chasing rent debts using County Court Judgments (CCJs) and argue many property owners simply are not being realistic about the effects of the pandemic on what was already a rapidly changing retail property market. 

The retailer plans to open more stores next year

This issue came to a head in the last month after a High Court judge ordered The Fragrance Shop to pay £160,000 in accrued rent and service charges to property giant Unibail-Rodamco-Westfield, owner of of the two megamalls in East and West London.

TFS chief executive Sanjay Vadera says he thought the retailer had agreed with the landlord to defer rent for the period when stores were closed.

“We got a new deal shaping up leases going forward with them, ” he says. ”We came to a compromise agreement on arrears. Everything was agreed with an asset manager through our property and finance directors. And that was four days to the court case.” Despite all this, the agreement dissolved and TFS ended up in court. 

For its part, URW says it has put in place “a number of support measures” for its retailers during the pandemic, including monthly payment, deferred rents and reduced service charges. 

However a spokeswoman for the landlord said “rent collection remains an issue as the moratorium is encouraging ‘can pay but won’t pay’ behaviour. 

“Ultimately our strategy is to work with those who engage with us to reach a fair and positive outcome for all, but in instances where efforts to engage were ignored, we have been forced to turn to litigation as a last resort.”

In the ongoing tit-for-tat battle, many retailers Retail Week spoke to were concerned that the ruling has emboldened other landlords to use loopholes in the moratorium to pursue non-payment of rents. 

For Boxpark’s Wade, this case only represents the start. ”Because of the moratorium, the majority of the damage has yet to be done. There will be lots of businesses unable to pay their rent, which haven’t paid rent in the last 12 months, and for the first time landlords can kick them out. Let’s not think we’re out the woods, we’re only just entering the woods and there are some very dark times ahead,” he says. 

”The reality is that landlords, shopping centre owners, high streets and town centres, we need to reinvent themselves. But we can’t do that by ourselves. The government needs to stop having a debate about business rates. The argument is over. Unless you radically change business rates on the high street than you’re not going to have shops, because they can’t compete with online.”  

A decent proposal

In a bid to encourage discussion rather than litigation, the government published a code of practice for the commercial property sector in June 2020. Although, as one source described it, the document itself had “no legal weight”. 

In April this year, the government launched a call for evidence on the moratorium, and set out a number of potential workable solutions for landlords and retailers ahead of the June 30 deadline. 

Law firm TLT partner Alistair Lomax says the proposed solutions ran the full gamut, from indefinitely continuing support for occupiers through to removing all support and “letting the markets dictate”.

The main solution that seems to have gained the most bipartisan support in recent weeks is a proposal from property giants Landsec and British Land. 

It calls for the moratorium to end on June 30, but advocates different treatment of rent payments covering the period between March 2020 to June 2021. 

The proposal advocates that tenants and landlords would have six months in which to agree concessions and repayments of arrears. If no agreement can be reached, the proposal would then allow landlords to pursue legal action against retailers, starting in December, through an independent arbitrator.

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British Property Federation chief executive Melanie Leech believes this proposal is the most feasible and has been broadly agreed upon by it, the British Retail Consortium and pubs and restaurant trade body UK Hospitality. 

“I don’t think we’re far apart with the tenant bodies in our thinking of what might work,” she says. “But there are still points of difference”.

A BRC spokesman agrees. “I think we’re about 70% agreed. But that remaining 30% is important.”

The spokesman picks out three major differences between representative bodies: the first being timings. Landlords are pushing to make the coming June quarter rent day the point from when retailers should start paying again, which retailers and in particular hospitality occupiers dispute. 

The second big sticking point is on the use of county court judgments (CCJs). Landlords want CCJs to remain outside the scope of the code and any agreement on the moratorium. The spokesman says that would lead to “an even bigger increase in the use of that measure if landlords feel that they can’t get renters through any other mechanisms.”

The third issue is the use of company voluntary arrangements (CVAs), the controversial restructuring tool which allows tenants to cut rents, change leases, or close stores through a creditor vote which is often weighted against landlords.

“The BL-Landsec proposal sought to reduce the ability of occupiers to use CVAs to restructure their debt,” he says. “Of course, we can’t support that because that would put tenants in a materially worse position than they currently enjoy”. 

With the deadline less than six weeks away, it seems getting all stakeholders to agree 100% to any proposal looks almost impossible. However, for the BPF’s Leech, the deadline itself is almost immaterial. 

“The thing that needs to happen in a hurry would be putting in place [occupier] protection for the arrears, which would require legislation,” she says. “That needn’t be terribly complicated, because the government’s already defined retail, hospitality and leisure for the purposes of the business rates relief.”

With legislation in place to ringfence the more than £2.5bn in retail rent arrears, Leech believes the market will effectively correct itself. 

Empty shop

While Leech and the BPF may be outwardly confident that the proposals can avoid further store closures and job losses, TLT’s Lomax is less so. He believes that any solution will inevitably lead to more CVAs and administrations among retailers and hospitality businesses. 

“You’re going to be looking at what the competition is doing,” he says. ”And if you see a competitor at a stroke deleverage debt, clean up their balance sheet and become super-competitive, you’re going to weigh that against the relative financial inefficiency of keeping all that debt in your capital structure, potentially for years to come. 

“For many businesses, the restructuring solution will be a no-brainer.”

With policymakers seemingly two-thirds of the way to an agreement, the next month will see stakeholders pulling out all the stops to find a mutually agreeable solution. However, given the size of the debt pile and the possibility that other support mechanisms may also disappear, it is likely that there will be more carnage on the high street before this is over.