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A Future for Forfeiture?

Will we see a flood of forfeitures in the commercial real estate market when the moratorium ends? Rob Nicholson of Ashfords LLP and Andrew Walker QC of Maitland Chambers look ahead

Property investors will already be aware of the immediate impact of the pandemic on their portfolios and funding. Most will also have heard about the moratorium on new forfeitures, under section 82 of the Coronavirus Act 2020. This runs until 30 June, but could be extended. It gives temporary respite for most commercial tenants, but without preventing landlords from using other measures to secure the payment of rent and other sums due. Many landlords will, of course, be looking to find an agreed way forward with their tenants, recognising their joint interests in financial survival..

But what will happen once the moratorium is over, and the pandemic subsides?  The economy will move into a recovery phase, but real recovery will take time, and will depend on how quickly consumer and business confidence returns. Landlords and tenants will both be suffering from financial strain, and rocked further by the shockwaves of insolvency. The Government’s financial support package may help some, but many have little room to take on extra borrowing, even if they can find someone prepared to lend.

The Act does nothing to protect tenants after the moratorium, but does it need to? Will landlords really have an appetite to forfeit? New occupier demand may be depressed into the medium term, funding to invest in redevelopment will be in short supply, and many landlords will be happier to hold on to whatever income they can, even if impaired and insecure. Why push a tenant over the edge and face a lengthy void?

Distress sales?
That will be the story for many, but not for all. Some landlords will have no choice. Not enough income to cover costs, financial covenant breaches, unsympathetic lenders: any combination may force them to liquidate holdings to stay afloat. Buyers with cash will be looking for bargains, and some will prefer immediate possession to income streams from tenants who are distressed or in declining markets.

Profit opportunities?
There will also be profit opportunities. Those looking to develop may be particularly well placed, if they have the funding. Forfeiture may mean they can accelerate proposals that they had put on hold until expiry of a previously viable tenant’s lease; or it may enable them to avoid having to pay statutory compensation to a long-standing tenant in order to oppose a new lease under the Landlord and Tenant Act 1954. There is likely to be a price in terms of public or market opprobrium, but some may be willing to pay it.

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