Please, no bailouts, as a tsunami of bad debt sweeps in from lockdown

Linda J. Dodson

Yet with some exceptions, landlords are not treating this hiatus as rent forgiveness. Many instead plan to recoup the money due when the rent suspension comes to an end. Having sat there for three months with little or no revenue coming in, leaseholders are not going to take that kind of demand lying down. Many would rather close than borrow to pay.

Good luck with finding new tenants if they do, or indeed going after delinquent tenants for rent arrears. Pret A Manger’s unilateral announcement that it will only pay 30pc of its next rent bill makes an interesting interpretation of the law of contract. Such actions also seriously disadvantage those who have been prudent, and have built up the resources to ride out the storm. Even so, I suspect landlords will get little sympathy from the courts if they determine to pursue matters among the “can’t pay, won’t pay” brigade.

But that’s not all. Most retailers are demanding a very considerable reduction in future rental payments in recognition of the fact that many high street outlets are simply not worth what they used to be. So good luck to the Government too in seeking to revive past levels of revenue from business rates.

In any case, previous levels of revenue from retail, hospitality and entertainment venues are going to take a long time to come back, if they ever do. Banking covenants on property loans are going to be broken right left and centre accordingly. Many loans are predicated on valuations that are no longer realistic. Banks are therefore left with the unenviable choice of either calling time on all that leverage, thereby threatening capital ratios with an incoming tsunami of bad debt, or engaging in further forbearance and allowing the bad debt to fester on balance sheets into the indefinite future.

It was the latter approach which dominated after the financial crisis. Many businesses survived, staggering on in zombified form, if only because banks couldn’t afford to put them into administration. There were admittedly massive debt write offs after governments provided banks with the capital to allow them, but also a lot of ongoing forbearance.

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