Cancel up to 100% of rent and rent debt for businesses forced to close during lockdown and a proportion for those with reduced turnover

The government should put in place at least partial rent cancellation, with up to 100% of rent and rent debt cancelled for businesses forced to close during lockdown and a proportion for those facing significant reduced turnover according to a new report from the New Economics Foundation (NEF). NEF is calling on the government to go further to prevent a wave of businesses facing insolvency or being evicted.

The analysis highlights that one in thirteen businesses have little or no confidence they’ll make it through the next three months, and over one in six businesses either anticipate having to make redundancies or are not sure if they’ll have to. SME bank lending was 80% higher in 2020 than in 2019, and it is estimated that approximately a third of firms with Covid Business Interruption Loan Scheme and Bounce Back Loan Scheme loans may struggle to make repayments.

NEF argues that a sectoral approach that concentrates on SMEs would support the most vulnerable businesses, while not expecting landlords with tenants in less affected sectors to forego rents.

The impact of Covid on companies has been highly unequal. While some companies, even many small businesses, have been able to increase their cash reserves during the crisis, others, particularly in sectors highly affected by Covid, like pubs or restaurants, are still really struggling. The analysis highlights the differing experiences of UK sectors during lockdown. For example, between 8 and 21 March 2021, 58%, 51% and 24% of workers in firms respectively in the ​‘Arts, Entertainment and Recreation’, ​‘Accommodation and Food Services’, and ​‘Wholesale and Retail Trade’ sectors were at least partially furloughed. This contrasts with only 3% of workers in ​‘Construction’ and ​‘Professional, Scientific and Technical Activities’.

This reduction in operating capacity experienced by many sectors, means that many firms were unable to pay their rents. According to NEF, in normal times, rent accounts, on average, for approximately 15% of costs for SMEs. With reduced turnover and limited ability to make full use of commercial spaces, rent debts are threatening to undermine the financial viability of businesses in some industries.

The report points to data from retail landlord, Hammerson, suggesting that only 41% of rent due from retail tenants for January to March 2021 was collected. And it’s estimated that UK commercial tenants will have accumulated £5.5 – 6bn of rent arrears in the first year of the crisis.

The report highlights evidence that government support to date doesn’t go far enough to support SMEs severely impacted by the pandemic. In general, SMEs are more vulnerable in crises than larger businesses, as they are typically less diversified, struggle to downsize, have less credit history, and have fewer financing options. For example, they generally do not have access to equity and bond markets. They also have fewer assets and are typically offered less favourable loan conditions, such as higher interest rates and having to pledge more collateral.

The report recommendation for a partial or full rent debt cancellation would going further than current government schemes in supporting the country’s ability to recover from the crisis by:

• Concentrating support on SMEs in highly affected sectors – SMEs are hugely important to the UK economy as they are responsible for approximately 61% of UK employment and 52% of UK private sector turnover.
• Minimising the transfer of state funds to commercial landlords — British property ownership data suggests that individuals who own commercial property (including those who own it via their pension fund) likely fall in the wealthier household income groups. Large transfers of wealth from the average taxpayer to the wealthiest in society are both unjust and economically inefficient (particularly during difficult economic times), as those on the lowest incomes typically spend a greater percentage of any new income received, and so produce the largest income multiplier effects.
• Minimising the future debt-burden for SMEs – high levels of business debt hinder future business investment and firms’ ability to grow which in turn could hold back the UK’s economic recovery through suppressing growth.

The policy would apply to unpaid historical rent and future rents during lockdown, and compensation could be paid to landlords pushed into financial hardship.

Lydia Prieg, Head of Economics at the New Economics Foundation said:

“SMEs are hugely important to the UK economy as they are responsible for the majority of UK employment and private sector turnover. If the government is committed to ​‘levelling up’ across the UK, it’s crucial that it supports SMEs that have struggled in this crisis.

“Rent is one of the ​‘stickiest’ non-staff costs faced by businesses, so rent arrears relief measures could substantially reduce the scale of a firm’s Covid-related debts and push them closer to breaking even.”

Leni Jones, Managing Director of Guardians of the Arches, said:

“Far too many small business owners are living in fear. Rent arrears are piling up, and at some point, the ban on evictions will be lifted. This proposal to waive rents for those severely affected by the pandemic would go a long way towards allaying those fears.

“It would allow small businesses to invest in their own future and the future of their communities. It’s critical that the government bring in measures to ensure an equitable solution to this landlord and tenant crisis.” 

Notes to editors

The report Business in Arrears: Preventing collapse in sectors hardest hit by Covid-19 is available at https://​newe​co​nom​ics​.org/​2​0​2​1​/​0​5​/​b​u​s​i​n​e​s​s​-​i​n​-​a​r​rears

The New Economics Foundation is a charitable think tank. We are wholly independent of political parties and committed to being transparent about how we are funded.

NEF used a multi-criteria analysis to compare current UK government policy and five alternative policies: partial rent cancellation, subsidised rent reduction, public sector pays, rent deferral, and Bank of England investment in land. The first four policies were inspired by international examples.

Six criteria were used to assess a successful government response to the commercial rent arrears problem. Three of these criteria were outcome principles, which describe the ends that an effective policy response ought to achieve. The remaining three were design principles that a policy ought to achieve in order to be feasible. Specifically, an effective policy should protect productive capacity, minimise regressive wealth transfers (and prioritise UK citizens), and minimise the future debt-burden for SMEs. Its design ought to prioritise help to those in need ahead of ensuring that only the most deserving receive support, maximise legal enforceability, and minimise administrative work.

According to this analysis, all five alternative policies outperform the UK government’s current stance, with partial rent cancellation emerging as the most favourable policy, and the rent deferral and public sector pays options coming in joint second.