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Commercial Tenant Eviction Ban Shifts Problem To Landlords And Lenders

London
Commercial Tenant Eviction Ban Shifts Problem To Landlords And Lenders
London's restaurants are empty due to a government shutdown.

A decision by the UK government to introduce measures halting evictions of commercial tenants for not paying their rent is a potential lifeline to businesses across the UK. But it creates a problem for commercial property landlords and lenders.

On Tuesday night, the government put a three-month freeze on evictions of commercial tenants who miss a rent payment because their business has been affected by the novel coronavirus

The ban means tenants who have seen income dry up or drop drastically overnight, particularly pubs, restaurants, retailers and serviced-office companies, have a period of grace when it comes to rent, one of the biggest costs for such occupiers. Businesses were due to pay their next three months of rent on 25 March, the spring quarter day.

As such, the move was welcomed by groups representing tenants in these sectors.

“With the next pending rent day falling this Wednesday, this move by the government is hugely welcome and will help to protect jobs across the sector,” UK Hospitality chief executive Kate Nicholls said in a statement.

But now, the locus of stress shifts from tenants to property owners and lenders. 

UK Hospitality calculated that bars and restaurants in central London alone had a collective quarterly rent bill of £450M to £500M. Those tenants now have £450M to £500M of cash freed up to help them manage their businesses through the crisis. But landlords now don’t have that money to run their businesses, including paying staff and managing costs. That money is also not available to make quarterly interest payments to lenders, meaning the distress is extended to the banking sector. 

“Landlords are putting their best foot forward and working with tenants,” The Lorenz Consultancy Managing Director Anthony Lorenz said. “But they are desperate to get that rent in the bank so they can get their interest paid. There are three people at the party now. Some landlords can afford to weather this but for smaller private landlords they might need that rent to pay interest or they are in breach of banking covenants, so landlords will need to negotiate with their banks, too.”

In the U.S., veteran investor Tom Barrack warned that a sharp drop in rental payments from commercial tenants could put huge stress on the banking sector. 

The government recognised that its new legislation could cause issues for landlords.

“As commercial tenants will still be liable for the rent after this period, the government is also actively monitoring the impact on commercial landlords’ cash flow and continues to be in dialogue with them,” it said when announcing the three-month moratorium on evictions. 

In that sense, all eyes in the real estate and banking industry will be on whether measures are introduced to help support property owners who have seen their revenue drop. 

“Property owners are similarly facing the impacts of coronavirus on their own businesses and will need further support — for example to meet their obligations to their lenders and to the savers and pensioners who rely on the income they generate — if they are going to help as many businesses as possible come through the next few weeks,” British Property Federation chief executive Melanie Leech said in a statement. 

Because many tenants are unlikely to be able to pay rent, landlords are in cash preservation mode. West End REIT Shaftesbury said Tuesday it is scrapping its dividend and had drawn down against its revolving credit facility in order to give it as much cash as possible to ride out the storm.