On 19 June 2020, the Government published its Code of Practice for commercial property relationships during the Covid-19 pandemic (Code). Its aim is to support businesses to work together to negotiate affordable rental agreements and sits alongside other measures, such as the moratorium on forfeiture of commercial leases.
The Code is a best practice document and is voluntary so does not cut across legally binding lease terms. It applies to commercial leases across all sectors, although it is expected that the hospitality, leisure and parts of the retail sectors will have most need of it. The Code and endorsement by bodies such as the BRC, Revo and RICS is said to apply until 24 June 2021.
The Code reiterates Government guidance that tenants who can afford to pay their rent should do so, whilst those who cannot pay in full should speak to their landlords and pay what they can. Landlords are expected to provide support to tenants where they are able.
Commercial Arrangements and Negotiations
There are four key principles for landlords and tenants to adhere to when entering into negotiations:
- Transparency and Collaboration: parties to act reasonably, swiftly, transparently and in good faith;
- A Unified Approach: parties to support each other in all of their dealings with other stakeholders to achieve the Code's objectives and to help manage the economic and social consequences of COVID-19;
- Government Support: acknowledgment that COVID-19 related subsidies or reliefs have been provided to help businesses meet their commitments;
- Acting Reasonably and Responsibly: parties to operate reasonably and responsibly in order to identify mutual solutions where they are most needed.
Tenants should be clear with their landlords about why concessions are needed and should be prepared to provide reasonable financial information about their business to support such requests. Landlords should provide concessions where they reasonably can, taking into account their own fiduciary duties and financial commitments. If a landlord is unable to accommodate a concession, a reasonable explanation should be given as to why.
The Code lists a number of considerations a landlord may wish to bear in mind in considering a tenant’s request to renegotiate their rent, including:
- the impact on the tenant of any closure and ability to trade via other means;
- Government support received and how it has been used;
- the tenant's track record of compliance with lease terms and concessions already granted;
- additional costs associated with adhering to social distancing requirements;
- needs of other stakeholders.
The Code usefully sets out a non-exhaustive list of practical arrangements that could be agreed between landlords and tenants to mitigate the impact of the crisis, including:
- rent free periods and deferral of rent payments;
- moving from quarterly to monthly rent payments and/or payment in arrears;
- rent reductions to current market rate and/or payment of some or all of the rent on a turnover basis incorporating any period during which the premises were closed;
- landlords drawing down from rent deposits but not requiring "top-up" from tenants before it is realistic and reasonable to do so;
- reductions in rent to reflect that the tenant occupies a portfolio of units owned by the same landlord;
- landlords waiving interest on unpaid rents or rents paid in arrears;
- sharing the cost of the rent for the unoccupied periods
Any of the above arrangements could be offered in return for something else of commercial value, including a reversionary lease, the removal of a tenant-only break right or an extension of the lease.
Service Charge and insurance charges
It is crucial for landlords that service charge and insurance rents are paid on time as this enables the continued maintenance and insurance of buildings and estates. Whilst the Code recognises that tenants need to pay such charges in full, landlords can take steps to mitigate the impact of this on tenants by:
- ensuring any service charge is reduced where costs have been lowered due to reduced use of a unit and reductions are passed to tenants ahead of end of year reconciliations;
- reducing costs by delivering services as efficiently as possible. Management fees ought to reflect actual work carried out;
- considering spreading the frequency of payments over shorter periods.
It should also be borne in mind by tenants and landlords alike that in some cases there may be increased service charge costs where a building or estate will need recommissioning work to be carried out after a long period of closure.
The Code is not legally binding and, in our experience, well advised landlords and tenants have already been having the discussions suggested by this guidance for some time; however, it may be a useful tool for less established landlords and tenants who may not be aware of all of their options. The Code may help to kickstart a conversation between landlords and tenants that would not otherwise know where to begin.
DWF is well versed in advising both landlords and tenants on the commercial and legal aspects of navigating the current crisis, as well as advising on pragmatic approaches to documenting new commercial arrangements.