Landlords and tenants find themselves navigating uncharted territory amidst the global pandemic crisis, which has sparked fears amongst both property owners and renters alike regarding their financial health both now and in the future.

This unprecedented situation has prompted the government to enter into discussions with leading businesses and trade associations in order to develop a new code of practice for commercial landlords and tenants.

It aims at promoting transparency and fairness in negotiations regarding rent, which will, it is hoped, encourage a cooperative and united approach dedicated to the protection of businesses.

The code, entitled: ‘Code of Practice for commercial property relationships during the Covid-19 pandemic’ was published by the government at the end of last week, just in time for the next rent payment date of 24 June 2020 and will apply until 24 June 2021.  It is not mandatory.

Whilst the code applies to the entire commercial sector, it is expected that it will be most significant to the retail, leisure and hospitality sectors.

The key points to note are:

Rental arrangements

– Renters who can pay are expected to pay.

– Landlords who have mortgage payment holidays are expected to help tenants.

– A wide range of sector members, including subletters and suppliers should be consulted to ensure that financial burdens are shared equitably, sensibly and flexibly.

– A proper process needs to be in place for struggling tenants:

  • Rather than just ceasing rental payments, tenants will need to provide relevant financial information in order to justify their request for a flexible rent payment plan to be drawn up with their landlords, which may amend payment periods, offer rent-free periods, offer rental variations to market rate, arrange to split the cost of rent for unoccupied periods, offer waiver of default interest on unpaid rent etc.
  • Relevant financial information may include:
  1. – profit and loss details;
  2. – trading capacity during lockdown and extra money spent on being able to trade;
  3. – details of debts owed to other suppliers;
  4. – financial forecasting reports.
  • landlords deciding to refuse support should be as clear as possible with their tenants about why they are not doing so
  • In considering tenant requests, landlords may consider factors such as:
  1. – the extent to which the tenant has been able to trade;
  2. – extra costs incurred via adhering to social distancing requirements;
  3. – how government financial support has been used;
  4. – previous track record;
  5. – the impact that providing help may have on the tenant’s competitors.
  • Should an agreed plan not be reached a third-party mediator may be appointed

– Rent payment plans should protect tenants from forfeiture for as long as they apply.

Service charge arrangements

Service charge costs and insurance will still be payable, but they should be reviewed in light of the following questions:

  • has the business been closed during the lockdown such that running costs have been lower?
  • Are the management costs charged truly reflective of the management services provided during the lockdown period?
  • Have costs increased as a result of having to make changes to buildings in order to make them coronavirus-compliant such that the frequency of payments should be spread over shorter periods to make them more manageable?

The code is said to be being introduced to codify the good practice already being shown by many.  On the one hand, this is refreshing. On the other, it provokes the question of how effective the code will be in reforming those who aren’t already showing cooperative behaviour, given that it is basically voluntary guidance.

It is safe to say that this code, regardless of its voluntary status, may be welcomed, especially by landlords who have recently had both their ability to forfeit leases for non-payment of rent suspended for a further three months (until 30 September 2020).  Whilst this extension is vital to the continued support for tenants, it comes amidst concerns that certain tenants will use it as an excuse for a continued rent payment holiday without feeling the need to engage with landlords at all, so the hope is that the code may go some way to evening up the score by reaffirming that landlords and tenants are facing pressures in equal measure, and working as a helpful transitional tool, which eases the sector back to normality following the end of the blanket ban on forfeiture.

Will it be made mandatory?  This idea has been floated but met with resistance by many due to the incongruity it may have with existing contractual agreements.

Whilst the code may not be the vehicle for the long overdue wider reform that some argue is needed in the commercial lettings market, it is hoped that it will at least reassure some that they are approaching things in the right way and encourage others to follow in their footsteps so that landlords and tenants may reach continued agreements that last beyond the end of the ban on forfeiture and cooperative tenants may avoid the cliff edge that they may otherwise have faced when forfeiture returns.

If you are in any doubt as to your obligations during the COVID-19 pandemic, then please get in touch with Lee Pearce, Joe Brightman or  Molly Frankham.