Government publishes the Code of Practice for Commercial Property Relationships during the COVID-19 Pandemic

The Government has published a Code of Practice for commercial property relationships during the COVID-19 pandemic.
 
Purpose
 
The Code was released shortly in advance of the usual June quarter rent payment date (24 June), when it is anticipated many commercial tenants will struggle to pay the full rent instalment.

The expectation (or hope?) is that the Code will sit aside more concrete restrictions that are currently in place in relation to enforcement methods – our commercial guide addresses those restrictions – and support packages available for struggling businesses.
It seeks to bring commercial parties together to “negotiate affordable rent agreements” and aims to provide tools for those involved in discussions (including agents/representatives, of course) to enable them to reach a “mutually beneficial agreement”.

It sets out the Government’s view of what best practice should look like, recognising that the above restrictions “cannot last forever”.

Effectiveness

The Code is entirely voluntary and does not change the underlying legal relationship between landlord, tenant and any guarantor.

For that reason, it lacks teeth, and cannot be relied upon by either party as legally binding guidance.

However, it does lend an element of credibility and support to a tenant’s proposals, and it is feasible (though by no means certain) that the Courts may have some regard to it when considering the reasonableness of each party on questions of costs, if matters become litigious.

The Code is specifically endorsed by a number of leading industry bodies, including RICS, the British Property Federation and Revo. Those bodies have agreed to “encourage their members to adhere to the principles and approach”. This support extends to June 2021, so parties should consider whether they are members of any signatory organisation(s).

Proposals

The Government is clear in its desire that “landlords should provide support to a tenant where reasonably possible, whilst having regard to their own financial commitments and fiduciary duties.”

The Code provides a set of principles which parties are encouraged to adhere to in their dealings with each other:

1. Transparency and Collaboration
2. A Unified Approach

• Government Support

1. Acting Reasonably and Responsibly

Those principles are book-ended by a recognition that there will be cases where principles have been followed but no agreement reached. In an appropriate case, use of a third-party mediator is encouraged where costs are proportionate, on the understanding both parties will meet their own costs of the mediation.

Practical Guidance and Considerations

The Code goes on to recognise that different solutions will be more appropriate than others in specific scenarios. Practical guidance is provided on how to adhere to the above principles, to included transparently providing financial information in support of a request, and reasons for a refusal.
Real-life examples are provided of possible agreements, which will be familiar to those already engaged in discussions:

• Rent-free periods
• Rent deferral periods
• A switch from quarterly to monthly rents
• Rent reductions, across other portfolio units where possible
• Drawing down from rent deposits without an immediate top-up requirement
• Waiver of interest
• Splitting the cost of unoccupied periods
• Concessions by the tenant in return i.e. removal of break clauses etc
• Reduction in payable service charges, where service costs have lowered
• Variation of service charge payment dates/frequency

All these arrangements will require legal input if they are to be properly drawn-up to reflect the intentions of each party and avoid the risk of unintended (and often costly) consequences from poorly drafted documents.

What’s Next?

The Code is intended to remain in place until June next year and is expected to be reviewed before then. The full economic consequences of the pandemic are still evolving, and the speed and scale of any economic recovery will take time to become clear.

The Code presents a set of helpful principles and factors which may be considered where a tenant is unable to pay its rent.  However, its voluntary nature means its effectiveness will be blunted severely if either party chooses to ignore it.  Where landlord and tenant relationships have deteriorated or negotiations (by reference to the Code or otherwise) simply do not succeed, the Code will provide little reassurance to tenants who face reduced income and mounting rental arrears.