Decoding the Code of Practice for commercial property – where are we now?

This article was written by Sanam Hussain. As this is a fast moving topic, please note that this article is current as at 26/06/2020. For further information, please contact Sanam HussainSimon Dawes and Angela Bhaseen.

On 19 June 2020 the Government published its long awaited Code of Practice for commercial property relationships during the COVID-19 pandemic (the Code) to assist landlords and tenants who have found themselves in an unprecedented financial situation due to the pandemic. Alongside publication of the Code, the Government extended the following restrictions which will provide greater protection for tenants for the upcoming quarter:

  • Forfeiture: landlords cannot take steps to forfeit leases until 30 September 2020 at the earliest.
  • Commercial Rent Arrears Recovery (CRAR): landlords cannot take steps to use this procedure until 30 September 2020 at the earliest. Furthermore the minimum amount before this procedure could be used was equivalent to 90 days rent or more – this has now increased to 189 days.
  • Statutory demands and winding up petitions: current proposals to be considered by the House of Commons and likely to become law later this month proposes that where a company cannot pay its bills due to COVID-19, the serving of statutory demands and presenting winding up petitions at court are banned until 30 September 2020 at the earliest.

What is the overriding objective of the Code?

For landlords and tenants to work together in ‘good faith, reasonably and flexibly’ and to co-operate and collaborate with one another transparently.

Who does the Code apply to?

All landlords and tenants in the UK who are parties to commercial leases, regardless of the sector those parties operate in. The Code is not restricted to a particular group or type of tenant.

Does the Code alter or vary the lease terms or any rent deposit or guarantee?

No the lease terms are not altered, varied or affected between the landlord, tenant and any guarantor. The Code does not in any way affect or change the underlying legal relationship between the parties to a lease.

What does the Code suggest for tenants who cannot meet their rent payments due to COVID-19?

The Code is clear: where tenants are in a position to pay their full rent to the landlord, they should do so. For the majority of tenants who have no option, the Code suggests:

  • Tenants who cannot pay the full rent but have some financial capacity, to make partial payment.
  • Where tenants cannot pay the rent, to communicate with the landlord.
  • A full or partial rent-free period for a set number of payment period.
  • A deferral of the whole or part of the rent for one or more payment period
  • The payment of the rents over shorter payment periods for a set time (e. 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.

What does the Code suggest landlords can do to assist tenants?

Landlords who can provide support should do so as follows:

  • Landlords drawing from rent deposits on the understanding that they will not require the deposits be ‘topped up’ by the tenant before it is realistic and reasonable to do.
  • To reduce rent, 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 unit.
  • To waive contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable.
  • To agree with the tenant(s) to split the cost of the rent for the unoccupied period between them.

Any of the above in return for other arrangements e.g. the removal of a break right in favour of the tenant, or an extension of the lease.

Service charge and insurance rent payments

The Code encourages tenants to prioritise paying these costs and recommends that:

  • Landlords consider what service charge costs should be charged based on the use of the property during lockdown - additional costs may have been incurred in relation to implementation of COVID-19 measures (enhanced cleaning requirements for example).
  • Any savings in the service charge, for example due to reduction in provision of services at premises that have not been occupied as a result of COVID-19, should be passed on to tenants prior to the end of the service charge year (this may contradict the requirements of a standard service charge provision in a commercial lease).
  • Where possible, service charge payment schedules are changed to allow for more frequent payments (for example switching from quarterly to monthly billing) in order to assist tenants with their cash-flow.

What about the all-important lenders – what does the Code suggest?

The Code merely states that landlords and tenants are encouraged to engage with their lenders and finance providers to seek flexible support in respect of existing financial arrangements. The Code refers to the guidelines issued by UK Finance which in summary confirms that lenders will support commercial landlord borrowers on a ‘case by case basis’.

Is the Code binding?

No, the Code is purely voluntary – indeed the Code states that each relationship will need to respond to these circumstances differently hence it is not ‘one size fits all’. However the Government has said it will “explore options to make [the Code] mandatory if necessary.” This is likely to depend on what extent the Code is adopted and followed by all landlords and tenants.

Comment

The Code, although a useful guide and reference point, does not contain anything which landlords and tenants were not already aware of or indeed have been negotiating or adopting. As commented in our earlier article when the effects of COVID-19 were becoming clear, many tenants took swift action to engage their landlords and most agreed workable solutions. The extension of the ban on landlords’ remedies may however further frustrate landlords. Many landlords already feel they have been ‘left-out’ by the Government with most protections granted to tenants and nothing on the same scale granted to landlords. The Government’s threat to make the Code compulsory means landlords and tenants will do well to take it seriously. However the general nature of the guidance might mean that it ‘lacks teeth’ and enforcement will not be straightforward.

The full code can be accessed here.

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