If the recent behavior of shoppers on London's Oxford Street is anything to go by, one could be forgiven for thinking that business has never been better for U.K. retailers. In scenes reminiscent of the now-annual Black Friday rush in the U.S., scores of bargain hunters crowded through store entrances June 15 as retailers reopened after a three-month closure to combat the spread of COVID-19.

But the reality for traders is bleak. Much of the U.K. retail sector is now on life support after almost a full quarter with little or no income. Lockdown measures imposed in March on "nonessential" retailers compounded the woes of a sector already struggling with the rapid growth of e-commerce, sluggish consumer spending growth, and fierce competition.

The damage is considerable, and mounting. There have been 31 retail company failures affecting 1,638 stores in 2020, as of June 17, according to data from the Centre for Retail Research. This is more than 70% of 2019's total.

For retail landlords, the picture is equally chilling. "The retail industry's ability to pay the rents that it has historically is diminishing in front of our very eyes," Richard Hyman, an independent retail consultant who has advised some of the country's largest retailers and retail landlords, said in an interview. "It's been blindingly obvious."

Landlords have already had a taste of what the COVID-19 lockdown means for rental income. Only 41% of retail tenants paid their rent for the second quarter on collection day in March, according to a survey of six of the U.K.'s largest property management firms by Remit Consulting. That figure had only slightly improved after one week, rising to 47%.

Prospects are even worse for the upcoming third quarter. Stephen Springham, head of retail research at real estate services firm Knight Frank, told the Financial Times that some property owners could receive as little as 10% of quarterly rent due June 24, which has been dubbed "Watershed Wednesday" by some industry figures.

"It will be unrealistic to expect those retailers who have effectively been closed since March to meet financial commitments without the benefit of normal transaction levels," David Fox, co-head of retail agency at Colliers International UK said in a statement. "This will continue to have ramifications for the months ahead, and set the template for the future of retail in the U.K."

The rent collection crisis has severely tested the landlord-tenant relationship. Some property owners, such as West London landords Cadogan Estates Ltd and Grosvenor Group Ltd., have rushed to the aid of their beleaguered tenants, offering 100% rent relief for a three-month period. Others are working with occupiers to strike new payment terms that reflect the massive hit to retailers' incomes.

Less collaborative efforts have led to ugly altercations. In late March, global retail giant H & M Hennes & Mauritz AB (publ), which has 305 stores in the U.K., threatened to leave its leases early if sales do not recover to pre-COVID levels by June 24. Low-cost fashion retailer Primark Stores Ltd. refused to pay £33 million of quarterly rent payments due in March and has since agreed to pay only a select number of landlords on the condition that they sign nondisclosure agreements.

'Cloud-cuckoo-land'

Given the increasingly gloomy sector forecasts, landlords should not bank on eventually collecting the rent lost in the current crisis, said Hyman. "If landlords think that these rents are simply deferred and they can crawl them back, they really are living in cloud-cuckoo-land," he said.

Government intervention has neutered landlords' power to force rent collection through the courts. Shortly after lockdown measures were imposed March 23, the U.K. government banned for three months the eviction of commercial property tenants. This was extended until the end of September on June 19. Legislation introduced in April temporarily voids winding up petitions and statutory demands to safeguard U.K. retailers against aggressive debt recovery actions.

In an attempt to ease tensions between landlords and tenants, the government has also introduced a new voluntary code of practice aimed at facilitating discussions between parties by "communicating best practice and presenting a unified approach for the industry."

The market's view of what the COVID-19 crisis means for retail landlords is scathing. The share prices of Hammerson PLC and Intu Properties PLC, both former members of the FTSE 100 stock index, have dropped by about 50% since the beginning of March.

The current crisis will accelerate the restructuring of the retail property sector, according to the latest study by the Urban Land Institute's Reshaping Retail report. A combination of the lockdown period and the negative economic outlook will impact rental income and valuations for some time, which will force the sector to adapt to a "new normal," it said.

Retail landlords should prepare to see the sector "shrink quite a bit" in the near future as consumer demand begins to dive, said Hyman. "Parallel to the problems caused by the lockdown, you've got a recession, growing unemployment, and people's ability to spend is going to be significantly impaired," said Hyman. "The state of health in our wider economy— that is the really massive headwind for retail waiting around the corner."