New property code to unite businesses over COVID-19 rent issues
With the ban on forfeiture evictions extended to 30 September, the government has introduced a new code of conduct to help commercial landlords and tenants work together and manage the impact of coronavirus on their businesses.
The story so far
In response to the coronavirus, the UK Government swiftly introduced measures to protect commercial tenants.
This began with the moratorium on forfeiture of leases for non-payment of rent and the Corporate Governance and Insolvency Bill will bring into law the temporary ban on statutory demands and serving winding up proceedings, including against tenants who haven’t paid their rent.
The moratorium on forfeiture was due to expire on 30 June but has since been extended to 30 September. For landlords that means another 2 quarter days without the remedy of forfeiture to deal with non-paying tenants.
COVID-19 commercial property code arrives
In response to that concern, the Government has released its ‘code of practice for commercial property relationships during the Covid-19 pandemic’, which it hopes will “support businesses to come together to negotiate affordable rental agreements”.
The code intends to “reinforce and promote good practice amongst landlord and tenant relationships” and states that “landlords and tenants must work together collaboratively”.
The code is voluntary and does not supersede existing UK property laws though you can expect that compliance with the code will be considered in the event of any proceedings, for example, in a tenant’s application for relief from forfeiture.
The code sets out 4 underlying principles:
- Transparency and collaboration
Parties are reminded that they are “economic partners, not opponents” with “a mutual interest in business continuity”. Parties should act reasonably, swiftly, transparently, and in good faith, subject to reasonableness.
- Unified approach
Parties should endeavour to help and support each other in dealings with stakeholders, governments, utility companies, banks etc in managing the consequences of the pandemic.
- Government support
The Government has made available a host of subsidies to businesses to meet their commitments, including to pay for rent and service charges, but it may be necessary to meet other liabilities too, such as utilities.
- Acting reasonably and responsibly
Point 4 is to be borne in mind by all parties when identifying solutions.
Where parties have followed the principles but cannot reach an agreement, the code encourages the use of mediation to facilitate negotiations, where the cost is proportionate and the parties share the expense of the mediator.
Practical steps for tenants
If you are a business or organisation seeking a rent concession, you should set out clearly to your landlord, why this is needed. Be prepared to provide relevant financial information about your business to enable your landlord to properly consider your request, with all of the necessary information to hand.
Practical steps for landlords
If you are a commercial landlord, consider your own fiduciary duties and commitments and provide relief where you reasonably can. If you cannot offer any concessions, clearly explain to your tenant why you are refusing the concession, taking into account the information they have provided.
The code sets out factors that you should consider when contemplating the request for rent concessions and these include:
- Periods of closure where your tenant has not been able to trade.
- Periods of restricted trading due to social distancing.
- Additional costs incurred by your tenant to safeguard customers.
- The needs of other stakeholders (e.g. banks, employees, suppliers).
- Government support that is available and how it has been used.
- Your tenant’s previous conduct.
The aim of any concession or variation should be to avoid forfeiture for failing to pay rent. The code sets out a number of possible variations/concessions that parties should consider:
- Full or partial rent free period for a set number of payment periods (e.g. 3 month rent free/ 6 month half rent).
- Deferral of the whole or part of the rent for one or more payment periods.
- Variation to the payment periods (e.g. paying monthly rather than quarterly)
- Payment in arrears rather than in advance.
- Rental variations (e.g. reducing rent to the current market rate/turnover rent).
- Drawing down from rent deposits.
- Landlord and tenant splitting the rent during times when the property was unoccupied.
- Waiving the entitlement to contractual interest on arrears.
- A variation to the rent (as detailed above) in exchange for a variation to the lease (e.g. 3 month rent free for an extension of the lease or removal of a break right).
Landlords are also encouraged to look at service charges and insurance to ensure those sums are cut where appropriate and the savings passed on to tenants.
However, it is also accepted that in certain circumstances there may be instances when service charge costs might increase due to the additional obligations of complying with coronavirus related health and safety matters, for example.
The recent announcement of the extension to the moratorium on forfeiture brings welcome relief to tenants but potentially, a fresh round of challenges for landlords.
The code promotes communication and negotiation between the parties so that both get a little of what they need. So far as forfeiture is concerned, until the restrictions on forfeiture are lifted, the hands of the landlord will remain tied.
There are other options available to landlords, although there are also other restrictions on certain enforcement mechanisms, so if you are at all uncertain about your position, it is best to get expert advice as early as possible.
Both parties should think carefully about what they can realistically achieve and what variations to the lease, if any, will result in the sustainability of their business.
Once a solution has been found, parties should take legal advice to ensure their interests are best protected and any variations are adequately documented.