Most commercial landlords are in a quandary right now
Commercial landlords are facing severe losses, especially in the retail and the hospitality sector, where the lockdown has ground operations to a halt.
Most importantly perhaps, landlords have to consider their options in the face of an uncertain future, as they must balance their short term needs with their long term profitability, as summarised by the British Landlords Association.
As a possible way out of this quandary, landlords with unpaid rents can also consider waiving the rent arrears with the help of mortgage holidays or remortgaging into the longer term to absorb potential reductions in rent if necessary, as explained below.
Experience from the residential sector
At Rent Happily the online letting agency I manage, we encourage residential landlords to get a mortgage holiday from their lender and to transfer the benefit as rent relief to their tenants.
Since the cost of the mortgage holiday is spread over the whole term of the mortgage, landlords can do the same with their tenants: adding the cost of the mortgage holiday to the rent so that future tenancies cover it. In other words, the mortgage holiday is financing the missing rents, and the repayment is spread across the mortgage term.
The main benefit of this strategy is to avoid rent arrears altogether. With the prospect of a recession looming ahead of us, jobs will be scarce, properties will be harder to rent, and rent arrears will only lade the credit record of tenants and the balance sheet of landlords, as explained in my previous article rent arrears are a time bomb ticking.
Under the current circumstances, it makes more business sense to transfer the benefit of the mortgage holiday to the tenants and get it back via the future rents, rather than charge rent arrears to the incumbent tenants, because it is cheaper, faster, and safer.
Converting rent arrears into rent reliefs in the commercial sector
Undoubtedly, the same arrangement described above can be secured for commercial properties. When their property is mortgaged, most landlords will have access to mortgage holidays to absorb the loss of income due to the lockdown.
Commercial lenders have indeed committed to providing the necessary liquidity to their landlords when required, as confirmed by UK Finance, so there is no reason why landlords couldn’t benefit from this opportunity.
When lenders give mortgage holidays and spread the repayments over time, it only increases the mortgage repayment marginally, and landlords can recover that extra cost through future rents. As it is a payment break, neither the landlord nor the tenant is in arrears, and by deferring the repayment, the lender gets their money back, the tenant gets a breathing space, and the landlord squares even in the long run.
Remortgaging to absorb rent reductions
High street businesses are suffering the most at the moment, and predictions even suggest potential 50% reductions in rents in the retail and leisure industry.
Mortgages are one of the most economical forms of credit. With the prospect of negative interest rates, it would make sense to use mortgage arrangements to absorb the structural shocks faced by businesses in the aftermath of the lockdown.
By negotiating longer-term mortgages, the monthly instalment faced by commercial landlords is reduced, and the rent can be adjusted subsequently if need be.
For instance, a landlord with a 15-year mortgage repaying £2,000 per month to their lender could potentially halve the monthly repayment by extending their mortgage over, say, 30 years. As the repayment is halved, the landlord can then adjust the rent accordingly, if the market requires it.
Keeping the economy afloat
The government has reiterated its willingness to support businesses, and a working group is currently drafting the Coronavirus Rent Renegotiation Code to put forward best practices for the industry effort recognises that the solution to the crisis lies partly in the assistance provided by the government and the financial institutions. Still, it mainly depends on the individual decisions of the parties involved: the lenders, the landlords, and the tenants.
By combining mortgage holidays and mortgage renegotiations, landlords can recoup not only the missing rents, but they can also face a potential reduction in rents. In doing so, they accommodate their tenants, they adapt to the changing economy, and they make the rental of their property viable in the long run, thus keeping businesses running.
Author: Boris Drappier
Founder at Rent Happily, a Bristol-based online letting agency.
Date: 10th of June 2020