A rent strike by some tenants, such as those in the retail sector, has placed many landlords in technical breach of their loan conditions.
Because breaches of covenant are being caused by unpaid rent, in part due to the government promising to prevent landlords from evicting tenants, it should show vocal support for landlords negotiating with their lenders, according to law firm Boodle Hatfield.
Adam Chamberlain, partner at Boodle Hatfield, said: “The government’s decisions to stop landlords evicting tenants has had the unintended consequence of putting many landlords in breach of their loans.
“That problem needs attention.”
A rent strike by some tenants, such as those in the retail sector, has placed many landlords in technical breach of their loan conditions.
Lenders can often use a breach of a covenant to impose financial penalties on the borrower, such as a higher rate of interest, paying down some of the loan at short notice, a one-off fee to the lender, or pay for a new valuation of the property.
The firm recommended that regulated banks and regulated lenders should be encouraged not to impose financial penalties on property investors for breaching lending covenants on commercial property loans.
Boodle Hatfield added that the government should take lessons from the treatment of commercial property covenant breaches in the 2008 recession; high street banks were thought to be too aggressive in trying to profit.
Since then, hedge funds, private equity funds and ultra-high-net-worth individuals have stepped in to lend to commercial property markets.
Chamberlain said: “There is a wide group of property lenders, including completely unregulated lenders, who may feel less pressure to be ‘fair’ to landlords in the current crisis than the big high street banks.
“We are sure that the big UK banks are going to take a more collaborative approach to covenant breaches than they did during the credit crunch, but they only represent a proportion of the market and [a lot of commercial property lending is an unregulated activity].
“If you are a landlord, that fears you are going to breach covenants, the best thing to do is approach your lender early and negotiate a solution.
“Lenders don’t want to seize properties from borrowers but they can still impose a lot of financial penalties that fall short of that. If you are a borrower you don’t want that to happen.”
