Make lenders take their share of the Covid-19 pain

A moratorium on rent and mortgage interest would stop emergency measures having a disproportionate effect on businesses

31st March, 2020
Make lenders take their share of the Covid-19 pain
The government has sought payment breaks from banks for property owners affected by the immediate crisis. Interest will still accrue, however. Picture:

The government is taking vital steps to save lives in the face of a health emergency. It also needs to enact extreme measures to prevent that health emergency becoming a long-term financial crisis.

These should include a moratorium on rent and mortgage interest incurred during the Covid-19 emergency. It must apply to both commercial and residential properties. It must be legally binding and not a half-hearted gesture, as seen to date.

By closing businesses, the government has imposed restrictions on property rights that are absolutely necessary. However, it has done so in a manner that disproportionately affects business owners and their employees, leaving banks and landlords unaffected.

If the government does not redress this balance, we will see an increase in private debt to unsustainable levels, resulting in a long-term economic crisis, business closures and home repossessions. We are preparing a feast for future vulture funds.

Under the constitution, private property rights are held in high esteem. In 1982, various pieces of rent control legislation were deemed unconstitutional by the Supreme Court because, among other concerns, the legislation reduced rent under existing contracts while leaving landlords with the significant financial burden of the properties’ upkeep.

Measures implemented to deal with the current crisis have equally one-sided effects on property rights.

Many businesses are being forced to close, whether explicitly, such as crèches and pubs, or effectively, to comply with social distancing requirements. Even businesses that have not closed completely have been told that, to facilitate social distancing, they cannot use their premises in accordance with their existing property rights.

Forcing businesses to close is a one-sided interference with the property rights of those who occupy properties. Banks that have loans secured on properties and landlords who rent them to tenants are completely unaffected.

Similarly, the government has limited how people use their homes, by telling people to stay at home, not to go to work and not to have visitors, this is a significant interference with property rights but, again, banks and landlords’ rights are unaffected.

The Banking and Payments Federation of Ireland has said that “banks are moving urgently to introduce measures that will best support businesses and personal customers impacted by the Covid-19 crisis”. If one looks at whom the payment breaks benefit, however, it is hard to escape the conclusion that they are designed solely for the benefit of the banks.

European Central Bank (ECB) rates are negative, meaning banks have to pay to deposit cash. During this crisis, there are very few, if any, businesses or individuals to whom banks can lend money. These factors combined mean that banks do not want customers paying back loans during the crisis. They have nothing to do with the money and it costs them to keep it. They would much prefer for customers to pay nothing for the next few months and to allow interest to accumulate significantly.

The length of payment breaks is also designed to provide the maximum benefit to banks. Banks are offering 90-day payment breaks. This is the maximum time that they can allow loans to go unpaid, before they have to hold more capital, under ECB rules. This means that after 90 days, payment breaks start becoming less profitable for the banks.

For businesses renting, nothing has been done to balance the interference with their property rights. They are forced by government to pay rent on empty premises. This is arguably unconstitutional.

Very little has been done for those renting their homes. An eviction moratorium has been imposed, but there is nothing to stop rental debts mounting or future evictions. Preventing rent increases during the crisis is of no practical benefit. Under existing legislation, landlords cannot increase rent above the market rate. The market rate for rent is already falling, so there is no basis upon which rent can be increased. Other than this, the government has simply hoped that landlords will be flexible.

Amazingly, struggling tenants are also being encouraged to apply for rent supplements. In a time of unprecedented national emergency, the government is looking to spend more money on subsidising landlords, rather than on the immediate health crisis, or future economic recovery.

All of this will lead to businesses and individuals struggling to meet debt obligations once the health emergency has concluded.

Without a moratorium on both rent and mortgage interest accruing during the Covid-19 crisis, any supports provided by the government, whether they be grants, subsidised salaries or emergency social welfare payments will evaporate to deal with these debts.

The restrictions being imposed by the government will cost the economy greatly, but are absolutely necessary to save lives.

The need for government support for businesses is inevitable, but the amount required would be significantly reduced if businesses did not have to pay rent or interest on empty buildings. All money spent on business supports will come out of budgets for housing, health and education for years to come and the poorest will suffer as a result.

Maintaining social cohesion is vital when dealing with a pandemic. The entire population needs to feel that they are dealing with it together. This will be harder to maintain if large sections of the population are becoming increasingly indebted, while the banks and landlords have their property rights protected, above all others.

A moratorium on rent and interest during the Covid-19 emergency isn’t about giving anyone a free ride. It's about ensuring all groups in society contribute to dealing with this crisis.

Donnchadh Woulfe is a practising barrister

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