On 19 June 2020 the Government published its Code of Practice aimed at assisting landlords and tenants as they navigate the effects of COVID-19 on their relationships and obligations. Although it had been mooted back in May that the Code could be made mandatory, what has been published is a voluntary code, designed to assist with discussions between landlords and tenants during the pandemic. This may be something of a disappointment to many commercial tenants and landlords who were hoping for more firm footed support and guidance.
The Code applies to all commercial leases which have been affected by COVID-19 but it is expected to be of most relevance to the hospitality, leisure and retail sectors which have been badly hit by the pandemic and ensuing lockdown. The Code will stay in force, in so much as a voluntary code is enforceable, until 24 June 2021.
The emphasis is on parties acting reasonably, flexibly and in good faith. Tenants are encouraged to approach landlords to discuss issues they may have in meeting their obligations, being transparent and providing supporting financial information where appropriate. It is suggested that Landlords should provide concessions where they reasonable can, taking into account their own commitments. Landlords who cannot agree concessions are encouraged to explain the reasons why to the tenant, taking into account the information the tenant has provided.
Both landlords and tenants are encouraged to engage with their lenders in respect of their existing financial arrangements and seek flexibility or support where needed. Though lenders are under no obligation to provide either.
The Code sets down four key principles:
1. Transparency and collaboration – parties are encouraged to act reasonably, swiftly, transparently and in good faith given the mutual interest in business continuity.
2. A unified approach – parties should help and support each other in dealings with third parties, including governments, utility companies and banks.
3. Government support – parties should recognise any government related subsidies or reliefs which have been received and which were provided to help businesses meet their commitments, including rent.
4. Acting reasonably and responsibly – parties should recognise the impact of COVID-19 and act to identify mutual solutions.
Factors to consider
When considering a tenant’s request for support or flexibility, landlords may wish to consider:
- The period for which the tenant’s business has been impacted by closure and its ability to trade via other means.
- The duration and extent of restricted trading due to social distancing.
- Extra costs and obligations on the tenant to enable customers to adhere to social distancing.
- The needs of other stakeholders, including banks, employees and suppliers.
- Government support received and how it has been used.
- The tenant’s previous track record in respect of its lease obligations.
- The impact support may have on the tenant’s competitors and on other support already offered.
- Possible alternative considerations in a regulated sector.
Potential new arrangements
The Code suggests the following options as potential arrangements which could be agreed:
- Full/partial rent-free period.
- Deferral of the whole/part of the rent for one or more payment periods.
- Payments of rents over shorter periods, for example, monthly rather than quarterly.
- Reducing rents to a current market rate.
- Drawing down on rent deposits without requiring immediate top-up.
- Reducing rents across a portfolio of units occupied by the tenant.
- Waiving default interest.
- Splitting the cost of rent for periods properties were unoccupied between landlords and tenants.
- Agreeing concessions (such as those listed above) in return for extending the lease, removing a tenant’s break or granting a reversionary lease, for example.
Service charges and Insurance
The Code recognises that service charges and insurance are not profit-making and should be paid in full unless agreed otherwise. However, landlords are encouraged to look at whether service charges could be reduced where the lack of occupation has lowered the costs incurred and potentially spreading service charge payments over shorter periods. Landlords should also pass on any known reductions to tenants as soon as possible to assist cash-flow.
For now, at least, the Code is voluntary and does not alter any of the legal obligations tenants owe to their landlords under their existing leases. While it is hoped that all parties will act reasonably and fairly in reaching new agreements to enable landlords and tenants to weather the current storm, only time will tell if landlords are willing and able to engage with the spirit of the Code.
A full copy of the new code can be found HERE
For further information please contact Claire-Elaine.Arthurs@gunnercooke.com