The government announcement on protecting business tenants who can’t pay rent may increase the level of rent default and defer payment until later than the March 2022 date. Tony Guthrie, explains the concerns.
It came as no surprise that the government extended its moratorium on evicting commercial tenants for not paying rent. But the long delay through to March 2022 was a surprise to most and the lack of detail, one might even say clarity, is also frustrating.
So what do we know and what are the implications for investors and therefore potentially for lenders?
Firstly the bad news: the focus of the announcement was rent. What wasn’t highlighted is that the business rates support measures are not being extended, at least in full. So retail, leisure and hospitality sectors who have been protected from paying rates are liable to pay business rates again from June, although the totals payable are capped for the rest of this year. So occupiers struggling to pay rent, will now have to prioritise paying their rates which can only impact adversely on their ability to pay rent. In essence the government has made itself the priority creditor.
Indeed, the absence of information from the government announcement is perhaps the biggest issue. It appears that the intention is to categorise the unpaid rent owed so that the debt, built up whilst businesses were compulsorily closed, is ring fenced and this ring fenced debt may not be payable even in March 2022. This debt will, it appears, be subject to compulsory and binding arbitration proceedings which will establish the tenants’ ability to pay and the appropriate timetable for payment but the details of this have not been released and until the legislation gets published (no date given for this) we won’t know the details. By contrast, it appears that rent due for the period after the date when a business was allowed to open will be due in March 2022 (unless the goal posts get moved again…..).
Collectively therefore these measures look to defer the date when unpaid rent has to be repaid until after March 2022 and additionally forces businesses to prioritise the payment of rates over the payment of rent, potentially increasing rent defaults. Lenders hoping that their borrower’s’ cashflows will improve as rent payments start to flow again as the economy reopens may it seems be disappointed. Lenders may wish to have these concerns in mind when reviewing recovery plans presented by borrowers.