The Government has now published the new code of practice, developed in conjunction with leaders from the retail, hospitality and property sectors, which is intended to reinforce and promote good practice amongst landlord and tenant relationships as they deal with the financial impact of the pandemic.
The objective of the code is to encourage landlords and tenants to do everything reasonable to enable otherwise viable businesses to continue operating through the period of recovery and in particular to allow landlords to support those tenants who are in greatest need and to maintain development activity, which the government believes will contribute to economic recovery.
The code is voluntary and does not change the underlying legal relationship between landlord and tenant and any guarantor. However, the government has previously stated that it would be willing to make elements of the code mandatory if landlords and/or tenants fail to comply.
When possession proceedings do recommence it is likely the court will have regard to the parties’ compliance with the code when determining the outcome of those proceedings and that of underlying debt recovery proceedings. The Code will apply until 24 June 2021.
The code is based around the following key principles:
- Transparency and collaboration – landlords and tenants have a mutual interest in business continuity. They are “economic partners, not opponents” and should act reasonably, swiftly, transparently and in good faith in all dealings with each other.
- Unified approach – landlords and tenants should help and support each other in dealings with other stakeholders including governments, utility companies, banks and financial institutions to achieve outcomes that reflect the code’s objectives.
- Government support – where businesses (landlord or tenant) have received government Covid-19 related subsidies or reliefs (e.g. Coronavirus Job Retention Scheme, loans, grants, business rates relief and/or VAT deferral), the parties must recognise that this support has been provided to help businesses meet their financial commitments. This includes costs such as supplies of goods and services as well as rent and other property costs such as insurance, utilities and service charges.
- Act reasonably and responsibility to identify mutual solutions where they are most needed.
- Third party mediator – there will be cases where landlords and tenants follow these principles but are still unable to reach a specific agreement. In such cases the parties should consider whether a third party mediator could be employed to facilitate negotiations provided the cost of this is proportionate and each party bears their own costs.
The Provisions of the Code
The key provisions of the code are as follows:
- Tenants who are in a position to pay rent and other sums due under the lease in full should do so.
- Tenants who are unable to pay in full should seek agreement with their landlord to pay what they can, taking into account the principles of the code and should be clear with their landlords about why a new arrangement is needed.
- Tenants should to “an appropriate and reasonable extent” provide financial information about their businesses to support their request for a new arrangement.
- Landlords should be willing to consider any reasonable case put forward by a tenant in distress and whether it can offer a temporary arrangement to enable the tenant’s business to survive. The landlord should consider the impact that Covid related legislation and initiatives have had on the business of themselves and their tenant when considering the request, including, but not limited to:
- Any closure period 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; and
- The impact that providing support may have on the tenant’s competitors and on other support already offered to tenants.
Landlords are entitled to take into account their own fiduciary duties and financial commitments when considering a request for a new arrangement.
- If a landlord refuses a concession it should be clear with their tenant about the reason for this.
- A new arrangement should protect against forfeiture for non-payment of rent after the ban on forfeiture is lifted and for so long as the rent payment plan applies.
- Unless agreed otherwise, service charge and insurance charge should be paid in full.
In respect of service charge specifically:
- Landlords should consider reducing service charges to reflect the lack of use of a property during the pandemic, although, conversely, the code acknowledges that in some cases additional service costs will have been incurred by landlords to deal with the pandemic;
- Landlords should ensure service charge costs are consistent with providing best value for occupiers;
- Where possible, the frequency of service charge payments should be spread out to assist with cash flow;
- Where there is a known net reduction in overall service charge due to lack of use of a property this reduction should be passed on to tenants as soon as possible ahead of the end of year reconciliation in order to help with cash flow; and
- Consideration should be given to the RICS guidance in relation to service charges and Covid-19.
Where landlords and tenants have already reached new arrangements the Code expects them to honour those arrangements.
Landlords and tenants should engage with their lenders to seek flexible support.
Types of arrangement that landlords and tenants should consider include:
- 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 the unoccupied period between them; and/or
- 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.
It is worth emphasising that the code has been developed in accordance with a number of trade bodies representing both tenants and landlords and has been endorsed by the following organisations who have encouraged the members to adhere to the principles and approach.
- British Chambers of Commerce
- British Property Federation
- British Retail Consortium
- Commercial Real Estate Finance Council Europe
- Royal Institution for Chartered Surveyors
- British Beer and Pubs Association
- British Independent Retailers Association
- Federation of Small Businesses
- Property Owners Forum
To read the code in full follow this link: