My blog of 26th March 2020 and update of 11th May 2020 covered the options for commercial landlords and tenants as things stood then.
Landlords and tenants should now also be aware of the government’s Code of Practice for Commercial Property Relationships during the Covid 19 Pandemic introduced in June 2020 (the Code).
The Code is voluntary with no legal force, but landlords and tenants are encouraged to follow it and some large trade organisations have endorsed it and have committed to encouraging their members to adhere, including British Chambers of Commerce, the British Property Federation, RICS, the British Beer and Pubs Association and the Federation of Small Businesses. The Code contains the full list of signatories.
The aim is to add to the legal measures already introduced, such as the moratorium on forfeitures and hold on statutory demands, CRAR and winding up petitions which are discussed in my previous blogs, by encouraging landlords and tenants to come together to negotiate affordable rental agreements.
With principles of transparency and cooperation, and an approach of “economic partners, not opponents” the Code makes clear that tenants who can pay in full should continue to do so. Others should communicate with their landlord and pay what they can. From the landlord’s point of view, they should provide support to businesses if they can. The emphasis is very much on mutual agreement.
The Code includes a recognition that government subsidies, loans or grants have been provided to help businesses meet their commitments, and that those include rent but also include other costs such as supplies, insurance, and utilities. The assistance of a third-party mediator is suggested where they’ve followed the code but failed to reach an agreement, and if the cost of that is proportionate.
Tenant should understand that if they are looking for concessions they should be transparent with their landlord and provide relevant financial information about their business.
Landlords should look to provide concessions where they possibly can, and if not, tell tenants why that is not possible, with reference to the information the tenant has provided. There is a list of factors for landlords to bear in mind when a tenant asks to renegotiate their rent, including the impact of the closure period and ability to trade, the extra cost of protecting customers, the needs of others affected such as employees, banks and suppliers, their track record as a tenant, and what government support they‘ve received.
If a new agreement is reached, under the Code and once the forfeiture moratorium is lifted, the landlord should not then forfeit for breach of original lease terms during the length of the new agreement.
The Code includes a set of options which are given as suggestions for varying lease terms. A full list is in the Code. A few examples are:
- full or partial rent-free period for a set number of payment periods
- Deferral of the whole or part of the rent for one or more payment periods
- Payment of the rents over shorter payment periods for a set time (e.g. monthly rather than quarterly)
- 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 realistic to do so
- Reductions in rent across other units occupied by the tenant and owned by the landlord
- Landlords waiving contractual interest on unpaid rents
- Agreeing to split the cost of the rent for the unoccupied period between the landlord and tenant
- 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
The Code also contains recommendations about adjusting service charges up or down as appropriate and spreading payments differently. A reduction in service charges due to lack of use should be passed on to tenants and management fees should reflect actual work carried out during the COVID crisis.
Many landlords and tenants will have already been employing the approach suggested by the Code. If you are a landlord or tenant struggling to reach an agreement with a tenant, it may help to bring the Code to the attention of the other party and recommend you both agree to follow it, especially if either party belongs to one of the trade organisation signatories.
Sarah can help with commercial property disputes for landlords and tenants, including advice and assistance with the above.
Contact Sarah Coates-Madden today [email protected]