Author: Anna Larbi
Today the UK Government published its snappily titled, Code of Practice for Commercial Property Relationships During the Covid-19 Pandemic. Click here to see a copy of the Code.
The Code aims to support business to "come together to negotiate affordable rent agreements" and intends to reinforce and promote good practice between landlords and tenants and encourage a unified approach. The Code is voluntary and does not override UK property law but does apply to the whole of the UK and ALL commercial property, including agricultural land. It set out a range of behaviours and conduct to be brought to bear in negotiations. Its overall message can be summarised as:
- Work together.
- Tenants who can pay in full, should. Tenants who cannot pay in full should communicate with their landlord and pay what they can.
- Landlords should provide support to tenants who need it where reasonably possible but they will need to take into account their own financial situation and fiduciary duties.
The Code has been endorsed by a wide range of leading representative bodies including, Revo, British Chamber of Commerce, British Property Federation, RICS and their members will be expected to adhere to the Code in their dealings. Together these signatories represent a large proportion of the UK property market and count the big household name retailers and landlords as members. They were instrumental in "beefing-up" the Code and its increased emphasis (from the early drafts) on a collaborative approach and behaviours, rather than simply regurgitating the types of agreement they could reach.
The Code is focussed on co-operation between landlords and tenants as economic partners and stresses they should act reasonably, swiftly, transparently and in good faith in their dealings.
The underlying principles of the Code are:
- transparency and in a collaborative manner.
- unified approach with other stakeholders including governments, utility companies, banks.
- government support, this support has been provided to help businesses meet their commitments, which includes rent.
- reasonably and responsibly and identify mutual solutions where most needed.
Every landlord and tenant relationship is different so there is no "one size fits all solution" proposed.
Tenants seeking rent concessions should provide justification for their request and be as transparent as possible. This includes providing financial information to the extent appropriate. Similarly, landlords refusing concessions should be equally transparent and provide a reasonable explanation of their decision.
The Code then suggests that the landlords may bear in mind certain matters that have had an impact on the business of the landlord and the tenant, such as closures, other means of trading, restricted trading periods, extra costs to adhere to social distancing, stakeholder needs, government support received, the tenant's previous track record, impact on competitors etc when making their decision.
Where the parties do reach an agreement, this should be recorded in writing and so long as the arrangement is adhered to the landlord cannot apply to forfeit the Lease.
The Code goes on to set out examples of the type of arrangements that could be agreed, namely:
- A full or partial rent free period for a set period of time.
- Rent deferrals for one or more payment period.
- Shorter rent payment periods i.e. monthly instead of quarterly and payments in arrears.
- Rent variations to reduce rents to a current market rent or to provide for all or part of the rent to be based on turnover.
- Rent deposit withdrawals by the Landlord on the basis that the landlord does not require the deposit to be topped up before it is realistic and reasonable to do so.
- Reductions in rent across a portfolio of properties occupied by the tenant and owned by the landlord.
- Landlord waiver of interest on late rent payments.
- Splitting the cost of rent for shutdown periods equally between the landlord and the tenant.
It is anticipated that such agreements will be for a fixed period and can come to an end on the happening of a particular circumstance.
This is rather a regurgitation of agreements already reached in the market rather than anything new. However, the Code makes clear that it does not consider it unreasonable for landlords to request a reversionary lease on reasonable terms, removal of a tenant break or a lease extension in return for such concessions, which have all been sticking points for many tenants seeking to come to terms with their landlord.
Service Charges and Insurance
One surprise feature of the Code is its statement that service charges and insurance payments should be paid in full, although it stopped short of stating that tenants should prioritise these payments over rent if necessary, which did appear in an earlier draft. The purpose of this is to ensure that buildings remain insured and safely maintained.
In return landlords should ensure that service charges are reduced where the lack of use of property has lowered service charge costs AND where practicable and consistent with providing best value for occupiers. Landlords should also ensure that any such reduction should be passed on to tenants ahead of end of year reconciliations. The frequency of payments should be spread over shorter periods where possible and management fees should reflect the actual work carried out in managing services during the Covid-19 crisis.
However, the Code recognises that there may be additional service costs associated with ensuring buildings comply with health and safety in the context of Covid-19 or recommissioning buildings after lockdown.
Landlords and tenants are encouraged to engage with their lenders to seek support where needed and UK issued guidance to lenders in this regard in advance of the Code's publication, which can be accessed here.
The signatories support of the Code applies until 24th June 2021 which is longer than the Government's Covid-19 tenant protection measures run (as they will fall away by 30 September at present) and is perhaps indicative that those protections may not be extended further unless another lockdown is ordered.
We shall wait to see the effect that the Code has on outstanding rent concession negotiations between landlords and tenants and the extent to which parties choose to adhere to the Code will determine its success or otherwise. The RICS Service Charge Code has been in place for years and yet many leases do not adhere to its principles, especially, but not limited to smaller landlords. It will be interesting to see if this Code and a spirit of togetherness can do better and help parties reach resolution where they have failed to do so already. It is perhaps more likely that the need to retain tenants in the wake of a swathe of retail and hospitality administrations and store closures on the part of landlords, and the end of the tenant eviction protection measures for tenants help focus minds more effectively than the Code.