The Government published the Code of Practice for commercial property relationships during the COVID-19 pandemic in June 2020.
The Code provides an interesting insight into the issues facing our sector from the Government’s perspective and should be reviewed carefully by landlords and tenants.
The default position has to be that If tenants can pay their rent, they should do so. However, the Code looks at what can be done where the tenant cannot. Landlords and Tenants are encouraged to act in good faith and be open and flexible in negotiations.
There is a non-exhaustive list of points for Landlords to consider in negotiations:
- Closure period(s) impacting the tenant’s business, and ability to trade via other means;
- Duration and extent of restricted trading due to social distancing requirements;
- Extra costs and obligations through protecting customers to adhere to social distancing requirements;
- Needs of other stakeholders such as banks, employees, suppliers during this period;
- Government support received and how this has been used;
- The tenant’s previous track record under its lease terms and any concessions to the tenant already agreed;
- The impact that providing support may have on the tenant’s competitors and on other support already offered to tenants;
- Possible alternative considerations in a regulated sector. For example, pubs that are regulated under the Pubs Code.
The Government also tables a series of alternative arrangements for consideration. The Code is explicit that these are suggestions and not intended to be binding but it may be useful for both parties to consider whether one or more of the following would be appropriate:
- a full or partial rent-free period for a set number of payment periods;
- a deferral of the whole or part of the rent for one or more payment periods;
- the payment of the rents 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 current 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 understanding 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 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 any unoccupied period(s) between them;
- 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 also contains guidance for dealing with service charges and insurance which again recognises that circumstances will vary and recommends flexibility. In many cases, inactivity and health and safety requirements have led to increased service charge costs via additional equipment, security and cleaning being required.
Even though the points in the code are not expressed to be binding, it may be that any matters expressed within leases as being subject to the Landlord or Tenant acting reasonably are consequentially already influenced by this guidance. This may be particularly relevant to alienation provisions.
It is important at the moment to distinguish between guidance that the Government provides and legislation passed by Parliament. However, the concern for many Landlords (and advisors) will be whether these suggestions crystallise into legislation or more rigid guidelines in the coming months.