The government has today published a code of practice for commercial property relationships, seeking to codify what should be existing good practice between commercial landlords and their tenants during these extremely difficult times for businesses on both sides. It recognises that everyone is impacted and that businesses should operate reasonably and responsibly to provide support where it is needed.
At the same time the Government has announced:
- an extended period prohibiting the use of forfeiture from 30th June to 30th September;
- an increase in the period of any rent arrears before Commercial Rent Arrears Recovery can be used to 189 days of unpaid rent and this will apply until 30th September; and
- an amendment to the Corporate Insolvency and Governance Bill extending the temporary ban on the use of statutory demands and winding-up petitions where a company cannot pay its bills due to coronavirus until 30 September which the courts are anticipating by granting interim injunctions to stop winding up petitions already.
The new code
The code, with which compliance is voluntary, emphasises the partnership between landlords and tenants and provides that in all dealings with each other in relation to the code and the COVID-19 crisis, both will act reasonably, transparently and in good faith. It further provides that landlords and tenants will help and support each other in all dealings with other stakeholders, including governments, utility companies, banks and financial institutions, and help manage COVID-19’s economic and social consequences.
Interestingly, the point is made that any government support that has been given to a business has been given to help meet commitments including rent and other property costs such as insurance, utilities and service charges. As the duty to act reasonably and responsibly extends to tenants who are in a position to pay in full, they are expected to do so, whilst allowing tenants who are unable to pay in full to pay what they can. In this way landlord support can be directed to those who need it most, but development projects can continue, which will contribute to economic recovery. Similarly, if a landlord is able to provide support whilst having regard to their own financial commitments and fiduciary duties, they should do so.
As both parties should act in good faith, reasonably and flexibly, tenants seeking concessions should be prepared to justify their request. Landlords refusing concessions should be similarly transparent. In both cases this transparency should include:
- Providing financial information to the extent appropriate and relevant, which may differ from case to case.
- Agreeing and adhering to a formal written rent payment plan to protect against forfeiture for non-payment of rent under the previous lease terms (to the extent that the rent has been amended by the rent payment plan) after the Coronavirus Act 2020 moratorium on forfeiture is lifted or for leases not covered by the moratorium (e.g., in agriculture), for so long as the rent payment plan applies. Rental payment plans should bear in mind the extent of the impact on the tenant’s business during the lockdown period and may include (but will not be limited to) any one or more of the following options:
- a full or partial rent-free period for a set number of payment periods – for example, the period of forced closure of a retail unit – which may be in return for a number of measures such as a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, extension of the lease by a period longer than the closed period, or other concession to the landlord;
- a deferral of the whole or part of the rent for one or more payment periods;
- the payment of rent over shorter payment periods for a set time (e.g., monthly rather than quarterly), including provision for their payment in arrears;
- rental variations to reduce ongoing payments to a market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site, incorporating any period during which the site was closed;
- landlords drawing from rent deposits on the basis that the landlord will not then require that the deposits be ‘topped up’ by the tenant before it is realistic and reasonable to do so;
- reductions in rent, either in whole or in part, across other units occupied by the tenant and owned by the landlord, as part of a negotiated agreement applying to a portfolio of units;
- landlords waiving contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable;
- provisions for ending the solutions on a fixed date, or on reaching the trigger point of particular circumstances;
- tenants and landlords agreeing to split the cost of the rent for the unoccupied period equally between them; or
- any of the above in return for other arrangements, e.g., a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, or an extension of the lease.
The code envisages that mediation might be appropriate where landlords and tenants have been unable to reach a specific agreement but both feel that a negotiated outcome could still be achieved. Courts are generally keen to encourage parties to mediate in any event and so this could effectively become an additional step to take in advance of any proceedings for rent arrears.
As far as possible, any service or insurance charge payable under the lease should continue to be paid in full. Tenants should prioritise payment of service and insurance charges ahead of payments of rent, to ensure that buildings can continue to be insured and safely maintained so that they are ready to support the economy’s recovery after the COVID-19 crisis.
Service charges should be reduced accordingly where the lack of use of a property has lowered the service charge costs incurred. Conversely, in some cases additional service costs may be incurred, e.g., 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. Landlords should ensure that service charge costs are reduced where reasonably possible and the frequency of payment should be spread over shorter periods. Where there is a known net reduction in the overall service charge of a property due to its lack of use (taking into account any additional COVID-19-related costs), this reduction should be passed on to tenants ahead of the end-of-year reconciliation. Management fees should reflect any reduced levels of expenditure.
The published code is very much aligned with what responsible commercial landlords and tenants have already been doing during the pandemic so far. Continuing to move forward with a spirit of collaboration and co-operation is vital as we approach the June quarter day, both to keep businesses moving and, as the economy starts to open back up, ensure the recovery is mutual.