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Coronavirus (COVID-19): Code of Practice for Commercial Property Relationships

24 June, 2020

The government published the much anticipated Code of Practice (the ‘Code’) for commercial property relationships on 19 June 2020. This guidance will be appreciated by both landlords and tenants alike, ahead of the June quarter rent payment date.

The Code of Practice is published in response to the impact of Covid-19 on landlord and tenants in the commercial property sector. RICS reports that only 57% of rent had been collected after seven days post the March quarter date, down from 99% of rent collected during the same time frame last year. The aim of the Code is to provide clarity for businesses when discussing rental payments and to encourage best practice.

Property dispute expert and Senior Associate Solicitor, Amelia Williams, and Trainee Solicitor Zaeem Mughal summarises the key points of the Code below.

Code of Practice

The Code is voluntary and does not change the underlying legal relationship or lease contracts between landlord and tenant and any guarantor. Although the Code applies to all commercial leases, it is expected that the hospitality, leisure and parts of the retail sectors will have most need of it.

Tenants should continue to pay their rent in full if they are in a position to do so. Tenants who are unable to pay in full should seek an agreement with their landlord to pay what they can. In seeking an arrangement and any changes to rental payments, landlord and tenants should take into account the principles of the Code.

Principles of the Code of Practice

Transparency and Collaboration: Landlords and tenants will act reasonably, swiftly, transparently and in good faith in all dealings with each other.

A Unified Approach: Landlords and tenants should endeavour to help and support each other in dealings with other stakeholders, including governments, utility companies, banks, financial institutions and others.

Government Support: Landlords or tenants recognise that where government support has been provided to businesses (whether landlord or tenant), this has been provided to help meet their commitments. This will include costs from supplies of goods and services as well as rent and other property costs such as insurance, utilities and service charges.

Acting Reasonably and Responsibly: Landlords and tenants will operate reasonably and responsibly to identify mutual solutions where they are most needed.

New Arrangements

Tenants seeking rent concessions should provide justification for their request and be as transparent as possible. This includes providing financial information to the extent appropriate. Similarly, landlords refusing concessions should be equally transparent and provide a reasonable explanation of their decision.

Landlords may wish to consider the issues below when considering a tenant’s request to renegotiate their rent:

a) Closure period impacting the tenant’s business and ability to trade via other means.
b) Duration and extent of restricted trading due to social distancing requirements.
c) Extra costs and obligations to adhere to social distancing requirements.
d) Needs of other stakeholders.
e) Government support received and how this has been used.
f) The tenant’s previous track record under the lease and any concessions already agreed.
g) The impact that providing support may have on the tenant’s competitors and other support already offered to tenants.

Examples of new arrangements:

  • A full or partial rent-free period.
  • A deferral of the whole or part of the rent.
  • Shorter rent payment periods (e.g. monthly instead of quarterly).
  • Rental variations to reduce rents to a current market rate and/or all or part of the rent to be based on turnover.
  • Landlords drawing from rent deposits and not requiring the deposits be ‘topped up’ by the tenant before it is realistic and reasonable to do so.
  • Reductions in rent across a portfolio of properties occupied by the tenant and owned by the landlord.
  • Landlord waiving interest on late rent payments.
  • 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.

Service and Insurance Charges

The Code also provides guidance in relation to landlords looking to recover service charge expenses and insurance premiums.

Any service charge and insurance charge payable under the lease is not profit-making, and, unless otherwise agreed, needs to be paid in full. In relation to service charges:

a) These should be reduced accordingly where the lack of use of a property has lowered the service charge costs incurred.
b) Landlords should ensure that service charge costs are consistent with providing the best value for occupiers.
c) Where possible, service charge payments should be spread over shorter periods.
d) Reduction of service charge should be passed on to tenants as soon as possible ahead of the end of year reconciliation to help with cash flow and business viability.
e) Management fees should reflect the actual work carried out in managing the services during the COVID- 19 crisis.

In some cases, there may be additional service costs associated with ensuring buildings comply with health and safety in the context of Covid-19 or recommissioning buildings after lockdown.

Final thoughts on the Code of Practice

In summary, the Code recognises that all parties may be under financial pressure as a result of the current crisis. It therefore encourages both landlords and tenants to work together to understand the challenges that the other party is facing, and to agree an approach that is acceptable to both, in answer to the specific challenges being faced.

It is clear that each situation will be unique and Steele Raymond LLP is well positioned to analyse circumstances on a case-by-case basis, and to assist both landlords and tenants to negotiate openly and reach agreement.

In addition, where issues presented by the current crisis are not addressed by the Code, disagreements may remain to be resolved, and Steele Raymond LLP’s growing property disputes & litigation team are well placed to assist.

*The information set out in this article is correct at the date of publication (24 June, 2020). The effect of coronavirus on businesses is a fast-changing area and so it is important to obtain legal advice to ensure you are properly protected. Visit our Coronavirus (COVID-19) Hub for more Leading Insights.

Contact us

If you have any questions regarding the impact of the Coronavirus upon your business or are seeking up-to-date legal advice on property dispute matters, contact Amelia Williams on 01202 294 566 or email AmeliaWilliams@steeleraymond.co.uk. Alternatively, contact a member of our Commercial Property team in Bournemouth.

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