Unpaid rent: the £6.4bn dispute that will shape the UK high street

In its 100-year history, the building at 160 Piccadilly has been a car showroom, a Chinese restaurant and a bank. It is now the Wolseley, one of London’s grandest cafés and a favourite haunt of the Beckhams and Kate Moss. But it may not be for much longer if the landlord, Jersey-based STJ Investments, wins a landmark legal case.

STJ is demanding that the Wolseley’s operators Corbin & King pay all of the almost £1m of rent debt which built up while the restaurant was closed during coronavirus lockdowns. It has tried to evict the Wolseley by taking Corbin & King to court. So far, the restaurateurs have defended themselves using a clause in the lease that precludes payment of rent if trading is not permitted at the site by government edict.

The landlord, which is controlled by the Russian-born Belgian oligarch Vladimir Zemtsov, is now trying to find alternative ways to reclaim what it says is owed. This week the landlord filed court papers alleging that the Wolseley had illegally sublet the premises because the lease was in the name of the Wolseley “Prop Co”, while the rent is paid by the Wolseley “Op Co”. Corbin & King says that claim is “spurious”.

The Wolseley is not the only business whose future hangs in the balance as a result of the pandemic. While coronavirus cases have spiked and fallen back over the past 18 months, the pile of rent that has gone unpaid thanks to government-mandated closures has continued to grow, currently standing at £6.4bn, according to Remit Consulting. Tenants are deep in debt and calling on their landlords and their lenders to share some of the pain.

How the crisis is eventually resolved will shape the future of UK high streets, determining which tenants, landlords and investors are left standing to put money into town centres, many of them struggling after 18 months of the pandemic.

A government ban on evictions from commercial properties has protected tenants since March 2020 and will remain in place until at least March 2022, after ministers opted in June to extend the moratorium for nine months.

The government also suggested that businesses able to trade should resume payments and that landlords ringfence pandemic-related debt until the end of the year, in the hope that tenants could get back on their feet before that.

But it has largely been left to businesses to create their own arrangements with landlords for paying off debt, a situation which has left a considerable number locked in bitter dispute.

Ministers have “thrown the challenge back to the market to resolve”, says Melanie Leech, chief executive of the British Property Federation, a trade group for property owners and investors.

By failing to issue clearer instructions, the government’s approach has further entrenched landlords and tenants into “deep opposing positions”, she says. “If only the government had said ‘here is what everyone has to pay’, at least you would have clarity. That is what has happened almost everywhere else in the world.”

‘Feudal’ leasing system

On one side of the argument are the shopkeepers, bar owners and restaurateurs forced to close during long periods of lockdown both last year and in early 2021. They complain that paying off rent debt in full is not only unjust but also impossible.

The most recent quarterly rent day was June 25. Three weeks after rent came due, leisure businesses in the UK had paid just half what was owed and retailers 70 per cent, according to analysis by Remit Consulting. The figures are an improvement on every other quarter of the pandemic so far, but still add to the building debt burden.

Several businesses, particularly in city centres, are also still trading at low levels given the trickle of people returning to offices and the lack of international tourism or big parties. This makes it nearly impossible for them to afford their rents despite operating restrictions having lifted.

Julian Knight, managing director of American Dry Cleaning, a 45-site chain in London, says landlords need to understand that the “entire genre of leases” based on footfall in busy locations has changed.

The company is currently trading at 60 per cent of its normal levels and has managed to negotiate rent reductions and deferments for the period between March 2020 and March 2021 at 40 sites. It has only achieved permanent changes to its lease contracts at “six or seven”, Knight says.

Some tenants have been exasperated by what they see as efforts by landlords to preserve or enhance lease terms they already saw as punitive even before the pandemic struck.

The UK commercial lease system is often described as “feudal” by disgruntled tenants, which have traditionally been expected to commit to longer terms than peers in Europe, as well as upward-only rent reviews.

The contract has roots “at a point of time in history when only landlords could read or write. If the peasant couldn’t pay their rent they were removed from their home and publicly flogged,” says Peter Bell, founder of the Commercial Tenants Association. “Landlords are suffering as much as tenants right now. But it’s not just what’s been going on for the last 12 months, it’s what’s been going on for centuries.”

A London restaurateur with several sites across the city says the Crown Estate, which manages properties on behalf of the Treasury, had attempted to increase rents by between 15 per cent and 20 per cent when one of his leases came up for renewal last August, while the Grosvenor Estate, the family estate of the Duke of Westminster, wanted to add complicated pre-emption rights in their favour into the lease at another site in exchange for a reduction in arrears. The Crown and Grosvenor Estates declined to comment.

Some landlords, either under pressure from their own investors or banks or simply unwilling to share the pain, have tried different measures to force operators to stump up. UKHospitality, the hospitality trade body, says that as many as a quarter of businesses have not yet come to terms with landlords over what to do about the unpaid arrears, a figure backed up by the BPF.

The end of the moratorium on evictions next March will be preceded by the ban on winding up petitions — through which creditors can push a company into liquidation if its debts are unpaid — being lifted in September. As winding up petitions are expensive on the part of the creditor, it is usually seen as a last resort.

The stand-off at the Wolseley is among the most high-profile disputes to have spilled out during the crisis and is one of few to be contested in court.

“The landlord’s avowed intent was to get every single penny of rent. Our argument was, we will pay what is due but we will not pay [the rent owed] for the pandemic period,” says Jeremy King, Corbin & King’s chief executive.

As soon as lockdowns hit in March last year, just days before commercial businesses faced the quarterly rent payment date, King, confronted with the prospect of no revenues for several months, wrote to landlords of the group’s nine restaurants.

“I said rent is due on the 25th [but] we are not in a position at this stage to pay it fully,” King said. He requested that instead of paying three months in advance, as is usually done in the UK, the business reimbursed each month’s rent at the end of the month. “Just about everybody was fine except for the Wolseley landlord who wanted to go into expensive legal detail to allow this to happen. I should have known at that point they were going to be difficult throughout.”

Corbin & King has racked up around £100,000 in legal fees fighting STJ Investments, which also insists that its property insurance is not liable to pay out half the sum of the rent under the policy terms.

Through its lawyers, STJ says it took court action “as a last resort” and that despite offering a “reasonable concession”, the Wolseley has “refused to pay any rent for the period when the restaurant was forced to close”.