The Code of Practice for commercial property relationships during the COVID-19 pandemic, issued on 19 June 2020, follows consultations with British Chambers of Commerce, British Property Federation, British Retail Consortium, Commercial Real Estate Finance Council, Revo, Royal Institution of Chartered Surveyors and UKHospitality. It aims to guide and encourage landlords and tenants to work together in order to protect viable businesses and assist a swift economic recovery and will apply until 24 June 2021. The Code promotes a similar spirit of co-operation to that already endorsed by recent Cabinet Office guidance on how parties to contracts can act responsibly and fairly to support the response to COVID-19 and protect jobs and the economy.
The Code is the UK government's latest response to ongoing payment issues raised by both tenants and landlords. Tenants are worried by rent repayment obligations in the face of significantly reduced income. Landlords are concerned that recent legislative measures have ignored the impact of reduced rent recovery on smaller corporate landlords and those meeting loan or rent payments of their own, where the suspension of rent payments by a significant number of tenants has put them under huge financial pressure.
Those hoping for government-backed underwriting of rents will be disappointed, and the government seems unlikely at this stage to increase the financial measures already made available through business loans, VAT deferral, rates relief and the furlough scheme. However, the Code, whilst voluntary and non-binding, proposes a framework for 'best practice' in commercial lease rent discussions during the COVID-19 crisis:
Rent payments and arrears
- Tenants should continue to pay their rent, or as much of it as they are able to pay, whilst landlords are encouraged to react sympathetically to tenant's financial constraints where possible. Tenants remain liable for their rent arrears unless a negotiated settlement is reached with their landlords. Third party mediation is recommended to facilitate negotiations.
- Tenants seeking rent concessions should be prepared to provide appropriate financial information in support of their request.
- Landlords should grant concessions to affected businesses to the extent they can, having regard to their own financial commitments. Any refusal to grant a concession should be accompanied by a reasonable explanation.
- Agreement of a formal written rent payment plan between lease parties is advised to "protect against forfeiture for non-payment of rent under the previous lease terms" beyond the expiry of the current forfeiture moratorium.
Insurance and service charge
- Tenants should continue to pay insurance and service charges in full, and in priority to the rent payments where necessary.
- Service charges should be reduced where lack of use of the property has reduced the service costs and frequency of service charge payments spread over shorter periods.
- Where extra services may be required and/or additional service costs incurred, for example where necessary to comply with COVID-19 health and safety requirements, landlords should ensure that service costs are reduced to the extent reasonably possible.
- Any known net reduction in overall service charge due to lack of use of a property (taking into account any additional COVID-19 related costs) should be passed on to tenants as soon as possible in advance of the annual service charge reconciliation to aid cash flow and business viability. Both parties should have regard to RICS guidance in relation to service charges and COVID-19 in their service charge discussions.
- Management fees should reflect the actual work carried out in managing the services and the service charge during the COVID-19 crisis (rather than the usual percentage-based levy).
The Code has been issued on the back of the government’s existing package of temporary protective measures (with newly extended deadlines to cover the June quarter) for commercial tenants including:
- the moratorium on forfeiture introduced by the Coronavirus Act 2020, which prevents any business being forced out of its premises if it misses a payment until 30 September 2020;
- banning the use of statutory demands (between 1 March 2020 and 30 September 2020) and winding up petitions presented from Monday 27 April 2020 until 30 September 2020, where a company cannot pay its bills due to coronavirus (to be introduced as part of the imminent Corporate Insolvency and Governance Bill); and
- secondary legislation (in the form of The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020) preventing landlords using Commercial Rent Arrears Recovery between 26 March 2020 and 30 September 2020 unless they are owed 189 days' unpaid rent.
The new Code is intended to form a response to the issues experienced by both landlords and tenants in the payment and receipt of rent during this period, and encourages parties to act in the interests of fairness to both sides. However, initial feedback on the Code has been mixed.
Landlords, already struggling with reduced recovery of the March quarter's rent, remain braced for significantly reduced rent receipts as the June quarter day approaches. Tenants, understandably hoping for greater underwriting of their rent obligations, highlight the insufficiency of the Code and other existing government measures in terms of keeping their businesses alive (particularly those in the retail, hospitality and leisure sector). Landlords and tenants have been considering concessionary rent arrangements, such as rent holidays, reduced rents or alternative rent payment periods, since lockdown occurred, though not always to the satisfaction of tenants. Whilst expecting landlords and tenants to share the pain in a proportionate and measured way, the Code introduces little of substance that isn't already being done within the commercial property market, though may serve as a reminder to both sides of the letting process to play fair.
If you have any questions on the matters raised in this alert, please do contact us for further advice.