Commercial property solicitor, Caroline Entwistle, examines the government’s new code of practice for commercial property relationships during the pandemic and whether there are early signs this is having a positive impact. Please contact Caroline by email or call her on 01225 462871.
In respect of their stated support of the commercial property sector, on 19 June 2020, the government published its Code of Practice for commercial property relationships during the Covid-19 pandemic (“the Code”), which is stated to apply until 24 June 2021.
In the foreword to the Code, minister Simon Clarke says “(T)his code will support businesses to come together to negotiate affordable rental agreements. It builds upon the discussions already taking place by giving those tenants and landlords affected by the crisis the tools to come to a mutually beneficial agreement; ensuring that best practice becomes common practice.” It sits alongside other government measures such as the moratorium on forfeiture of commercial leases.
While it is universally applicable, it is expected that the retail, hospitality and leisure sectors have the greatest need for its provisions to succeed.
It is important to understand that the Code is a best practice document. As such, it does not override the terms of a lease.
Pay what you can afford
The Code says that a tenant who can afford to pay their rent should do so, and if they cannot pay in full, they should speak to their landlord and “pay what they can.” Landlords are expected to provide support to their tenants “if they too are able to do so.”
The Code sets out four key principles for the parties to adhere to when entering into negotiations:
- Transparency and Collaboration: The parties shall act reasonably, swiftly, transparently and in good faith.
- A Unified Approach: The parties are to support each other in all of their dealings with other stakeholders to achieve the Code’s objectives and to help manage the economic and social consequences of COVID-19.
- Government Support: The parties’ acknowledgment that COVID-19 related subsidies or reliefs (such as the Job Retention Scheme, loans, grants, business rates relief or VAT deferral) have been provided to help businesses meet their commitments.
- Acting Reasonably and Responsibly: The parties shall operate reasonably and responsibly in order to identify mutual solutions where they are most needed.
Tenants must set out clearly to their landlords why concessions are needed. In addition, they should be prepared to provide reasonable financial information about their business to support such requests.
Landlords should provide concessions where they reasonably can, taking into account their own fiduciary duties and financial commitments. In the interests of transparency, a landlord refusing a concession should provide a reasonable explanation as to why.
Issues for landlords to bear in mind
The Code lists a number of considerations a landlord may wish to bear in mind in considering a tenant’s request to renegotiate their rent. These include:
- the impact on the tenant’s business of any closure and their ability to trade via other means;
- the government support received by the tenant and how it has been used;
- the tenant’s track record of compliance with the terms of the lease and any concessions already agreed;
- the additional costs and obligations incurred by the tenant through adhering to social distancing requirements;
- the needs of other stakeholders such as banks, employees and suppliers.
The Code sets out a non-exhaustive list of possible new arrangements that could be agreed by the parties to help mitigate the impact of the crisis. These include:
- a full or partial rent-free period and deferral of rent payments for one or more payment periods;
- a move from quarterly to monthly rent payments and/or payment in arrears;
- a rent reduction to current market rate and/or payment of some or all of the rent on the basis of a proportion of turnover, incorporating any period during which the premises were closed;
- the landlord drawing down from the rent deposit with no requirement for the tenant to “top-up” before it is realistic and reasonable to do so;
- reductions in rent to reflect the fact that the tenant occupies a portfolio of units owned by the same landlord;
- landlords waiving contractual default interest on unpaid rents or rents paid in arrears;
- the parties sharing the cost of the rent for unoccupied periods;
- any of the above arrangements in return for something else of commercial value, such as a reversionary lease, the removal of a tenant-only break right or an extension of the lease.
Service and insurance charges
The Code recognises that it is crucial for landlords that service and insurance charges are paid on time, otherwise the continued maintenance and insurance of property is put at risk. Further recognising the effect this may have on a tenant’s finances, the Code sets out steps that landlords can take to mitigate the impact of this on tenants:
- Service charge costs may have been lower as a result of reduced use of the property. If so, landlords should pass the saving to tenants ahead of end of year reconciliations.
- Management fees should reflect actual work done. Efficiencies should be passed on to the tenants.
- Landlords should consider spreading the frequency of payments over shorter periods.
Notwithstanding the above, it should also be borne in mind by both parties that in some cases service charge costs may actually increase. The Code uses the specific examples of where “in order to operate a building which complies with health and safety requirements in the context of COVID-19, or recommissioning where buildings are reopened.”
Encouraging parties to work together to navigate their way through this crisis is of course a great idea from which everyone can benefit. However, the Code is not legally binding and word is that while many smaller commercial landlords have for some time now been keen to talk, the tenants of larger institutional landlords are finding their approaches are mostly falling on deaf ears.
If both parties are prepared to talk constructively, the Code may provide a useful framework for discussion. But, before committing themselves to potentially long-term changes to their relationship, in addition to speaking to their accountant, each party is strongly advised to take independent legal advice.