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QD view – Rent judgment good news for REITs

REIT investors will be breathing a huge sigh of relief following a series of High Court judgments on rent arrears that fell in favour of landlords this week.

AEW UK REIT (AEWU) was one of three landlords that successfully sued tenants for unpaid rent. In its case two tenants – Sports Direct and Mecca Bingo – have been ordered to pay over £600,000 in arrears, while AEW expects a further £600,000 that has fallen due since the claim was made to also be collected.

The impact on rent collection rates and earnings is significant. The £1.2m that AEWU now expects to collect puts a huge dent in the £1.6m of outstanding rent that has built up since the start of the pandemic (excluding rent on payment plans or under negotiation).

One would expect that now the legal precedent has been set, barring a successful appeal, REITs and listed property companies will start to see rent collection rates shoot up.

Although government legislation, which prevents landlords evicting tenants or filing winding up orders, remains in place (until at least June 2021), it doesn’t prevent them from suing for damages relating to unpaid rent.

It is not the smaller, independent retailers that landlords are going after here. In the vast majority of cases, landlords have bent over backwards to help tenants that have seen turnover decimated during lockdowns with rent-free periods and deferments. These rent arrears will take a long time to come through, if ever.

It is the well-resourced national or international tenants that can pay but have refused to do so and, in most cases, refused to even engage in meaningful negotiations with landlords.

Unibail-Rodamco-Westfield (the owner of Westfield London) and Bank of New York Mellon also successfully sued tenants (The Fragrance Shop and Cineworld, respectively) this week.

In the judgment on the AEWU case, Master Dagnall said: “In times of uncertainty the law must provide a solid practical and predictable foundation for the resolution of disputes and the confidence necessary for an eventual recovery. Contractual rights are to be evaluated by applying settled principles to the contract in question.

“Legal certainty remains paramount and gives the surest basis for resolution. That has been the basis of my analysis and this judgment. Anything else is a matter, in my view, for parliament and not for the courts.”

The frustration of many property fund managers has been the reluctance of their well-capitalised tenants to come to the negotiation table to discuss an amicable solution. I suspect a sudden urgency may come over said tenants following these rulings.

QD view – Rent judgment good news for REITs

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