New Voluntary COVID-19 Code of Practice for commercial property in the UK

Summary

The Government published on 19 June 2020 a new voluntary Code of Practice for the commercial property sector in the United Kingdom, which is intended to reinforce and promote good practice amongst landlord and tenant relationships as they deal with the income shocks caused by the COVID-19 pandemic. The Code does not change the underlying legal relationship or lease contracts between the landlord and the tenant and any guarantor. Various leading landlord and tenant organisations have endorsed the Code. The Code applies until 24 June 2021.

The Code

The Code (entitled “Code of Practice for commercial property relationships during the COVID-19 pandemic”) emphasises the importance of landlords and tenants working together collaboratively to ameliorate the pandemic’s impact and its aim is to facilitate those discussions by communicating best practice and presenting a unified approach.

Tenants who are in a position to pay in full should do so, while those who are unable to pay in full should seek agreement with their landlord to pay what they can taking into account the Code. Landlords should provide support where reasonably possible, having regard to their own financial commitments and fiduciary duties.

It may be in the interest of both parties to reach a new temporary agreement and the Code provides a selection of options for how to agree new rental payment arrangements for tenants and landlords to discuss. Landlords should be willing to consider a reasonable case put forward by a tenant in temporary severe hardship as a result of the pandemic’s impact.

The Code applies to all commercial leases held by businesses which have been seriously negatively impacted by COVID-19, but the hospitality, leisure and certain retail sectors will likely have most need of it.

The Principles

The Code contains a number of key principles:

• Transparency and collaboration – Landlords and tenants are economic partners and not opponents. Therefore, in all dealings with each other, in relation to the Code and the COVID-19 crisis, they will act reasonably, swiftly, transparently and in good faith (but without prejudice to statutory and regulatory requirements of reasonableness).
• Unified approach - Landlords and tenants will try to help and support each other in their dealings with other stakeholders including governments, utility companies, banks and financial institutions, to achieve outcomes reflecting the Code’s objectives and help manage COVID-19’s economic and social consequences.
• Government support – There is a recognition that Government support has been provided to help businesses meet their commitments, including rent and other property costs.
• Acting reasonably and responsibly – Landlords and tenants will operate reasonably and responsibly recognising COVID-19’s impact, to identify mutual solutions where they are most needed. Where they cannot reach specific agreement, they may agree to use third party mediation (if the cost is proportionate) to help facilitate negotiations.

New rental arrangements

In seeking any arrangement and changes to rental payments, both the landlord and the tenant should act in good faith, reasonably and flexibly as set out in the Code’s principles.

Tenants seeking concessions should be clear with their landlords why they are needed and this will involve the provision of financial information about their business to an appropriate and relevant extent. Landlords should provide concessions where they reasonably can, taking into account their own fiduciary duties and financial commitments and, if they refuse to do so, they should provide a reasonable explanation of their decision.

The Code includes a non-exhaustive list of issues for the landlord to bear in mind in considering a tenant’s request to renegotiate the rent. The factors mentioned could give an indication of the extent to which the tenant’s financial position has been impacted across its entire business. Examples mentioned include any closure period impacting on the tenant’s business and its ability to trade via other means; Government support received and how it has been used; and the tenant’s previous track record under its lease and any concessions already agreed with the tenant.

Agreeing and adhering to a new agreed arrangement should protect against forfeiture (or irritancy in Scotland) for non-payment of rent under the previous lease terms (to the extent the rent has been amended by the arrangement) after the Coronavirus Act 2020 moratorium on forfeiture (and similar measures in Scotland) is lifted and for so long as the rent payment plan applies.

The Code sets out options of new arrangements that could be agreed to by the landlord and the tenant. They are intended as suggestions and parties are not obliged to adopt them, nor are they an exhaustive list. To quote a few examples: deferring whole or part of the rent for one or more payment periods; rent-frees; moving from quarterly to monthly payments for a set time; use of turnover rents; the rent concession in return for say a reversionary lease on reasonable terms or the removal of a tenant’s break right.

Service charge and insurance

The Code stresses that it is important that buildings continue to be insured and safely-maintained so that they are ready to support the economy’s recovery after COVID-19 and therefore, unless otherwise agreed, service charge and charges for insurance need to be paid in full. The Code makes some suggestions in relation to service charge recognising the impact it may have on tenants’ finances, including landlords should ensure service charge costs are reduced where practicable and consistent with providing best value for occupiers; there may be additional service costs required for example to meet health and safety requirements; and the RICS Professional Statement on service charges in commercial property and other RICS guidance should be taken into account.

Lenders

Landlords and tenants are encouraged to engage with their lenders and finance providers to seek flexible support in relation to their existing financial arrangements where this is needed.

Signatories

To date, the signatories to the Code include the following representative bodies who formed the Code’s steering group:

a. British Chambers of Commerce

b. British Property Federation

c. British Retail Consortium

d. Commercial Real Estate Finance Council Europe

e. Revo

f. Royal Institution for Chartered Surveyors

g. UKHospitality

The Code lists other signatories who support the Code’s principles.

Conclusion

The new Code is voluntary so no parties are bound to comply with it. The signatories themselves express their support for it until 24 June 2021. It is intended to encourage a collaborative response between landlords and tenants of commercial property in the UK to address the consequences of the COVID-19 crisis. It is also worth noting that the RICS’s new Code for Leasing Business Premises will be effective from 1 September 2020.

The new Code of Practice can be accessed here.

An article of extending the period of the temporary restrictions on landlords’ remedies is considered separately here.