December 6, 2021

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The UK high street’s rent shortfall must be tackled

Property sector updates

A £6.4bn shadow is looming over Britain’s high streets. That is the amount of rent left unpaid as emergency measures to tackle Covid-19 turned city centres into ghost towns. Even as restrictions have lifted, the pile of arrears is growing, with 23 per cent of rent owed since March 2020 unresolved in the retail, hospitality and leisure sectors. Distrust on both sides is also mounting: landlords see tenants using the pandemic as an excuse for a rent holiday, while tenants complain of freeholders’ impossible demands. Government plans to mandate arbitration therefore should be sped up: the can may only be kicked down the street for so long.

The government has already failed to meet its aim of legislating in time for the summer recess. That was a missed opportunity. It sketched out earlier this month how arbitration might work, with costs awarded against anyone negotiating in bad faith. That may be enough in itself to bring some holdouts to the negotiating table without then resorting to arbitration. But the policy statement lacked detail, with more promised “in due course”. There is only so much time: a moratorium on commercial evictions ends in March 2022, while a ban on winding-up petitions lifts in late September.

Arbitration alone is not in any case a panacea. Arbitrators can only determine what a contract says and where it has been breached. In many cases, contract terms are not in doubt: tenants are simply unable to pay what is due. The government must therefore also accelerate plans to legislate what debts accrued during the lockdown can be ringfenced and what pain can be shared between the parties.

While billions of pounds have been thrown, necessarily, at keeping high streets alive over the past 17 months, it would not be appropriate for more taxpayer money now to be used to pay rent to landlords. This would not only be unfair on the majority of tenants who have already come to an agreement but would also be a form of moral hazard that instigates bad behaviour. 

The debate is often portrayed in David-and-Goliath terms but the reality is more nuanced, with sharp practice on both sides. Some large and well capitalised retailers, including some backed by private equity, capable of paying rent have refused to do so. Not all landlords are offshore tycoons or hereditary peers, either. Although their role has decreased markedly in recent years, UK insurance companies and pension funds still owned about 17 per cent of the country’s commercial property in 2018, according to the Investment Property Forum.

But the pandemic has exacerbated longstanding tensions in the UK’s commercial property market, which is one of Europe’s most inequitable when it comes to tenants. The UK’s leasehold system, where landlords can impose upward-only rent reviews, needs fundamental reform. That will be politically unpalatable for a government that relies on the property sector for a quarter of party donations, and which is also trying to “level up” high streets across the country. Just as important — if equally thorny — is an overhaul of the business rates system, which is no longer fit for purpose in a world where online retailers were stealing a march on their bricks-and-mortar rivals even before the pandemic.

Ministers have so far preferred to observe the rental arrears mountain from afar, leaving tenants and landlords to thrash out terms. The majority have done so. But the time has now come for the government to ensure protracted disputes over billions of pounds of rent arrears do not add to the woes of the already precarious British high street.

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