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UK government launches code of practice for commercial property relationships during the COVID-19 pandemic

Introduction

It has been well documented how the Coronavirus pandemic has had (and continues to have) a huge impact on the commercial property market in the UK and the government response has, correspondingly, been far-reaching. To date a moratorium on forfeitures has been enacted and a number of associated measures for tenant businesses have been applied. £330 billion of guaranteed loans have been made available and the government has introduced a range of interventions including business rate relief and the Coronavirus Job Retention Scheme. In addition the government is currently legislating to limit the use of statutory demands and winding up petitions until 30 September through the Corporate Governance and Insolvency Bill.

Now, as lockdown restrictions begin to ease and the UK can begin to look towards life after the pandemic, the government has issued a commercial property Code of Practice (“the code”) designed to help transition the commercial property market back to normality and deal with what it describes as pandemic-associated “income shocks”.

The code is intended to “…support businesses to come together to negotiate affordable rental agreements. It builds upon the discussions already taking place by giving those tenants and landlords affected by the crisis the tools to come to a mutually beneficial agreement; ensuring that best practice becomes common practice.”

What does the code say?

It should be stressed that the code is voluntary “…and does not change the underlying legal relationship or lease contracts between landlord and tenant and any guarantor.”

The code is a set of points designed to encourage negotiation and alternatives to keep businesses viable. Some of these key points are summarised below:

  • Landlords and tenants must work together collaboratively to enable viable businesses to continue operating and where possible find sustainable arrangements outside the letter of their leases to make this so.
  • Tenants who can pay in full, should do so but those that cannot pay in full should seek agreement with landlords to pay what they can.
  • Landlords should be willing to discuss reasonable requests for support from tenants in financial distress.
  • The relationship between landlord and tenant is defined by law (and by contract in Scotland), and parties may wish to seek legal advice when agreeing payment arrangements.
  • Renegotiation of rent should be considered as an option to maintain an otherwise viable business.
  • Current government interventions such as the moratoriums on forfeiture do not change the existing legislative relationships between tenant and landlord. “These interventions are intended to be exceptional, time-limited measures to deal with unprecedented times of acute market shock.”
  • A number of UK organisations (including the British Property Federation, Federation of Small Businesses and the British Chambers of Commerce) have endorsed the code, applying as it does until 24 June 2021.
  • The code sets out a number of principles upon which the code is built, i.e. the spirit into which landlords and tenants are asked to enter into when discussing their situations. These include: transparency and collaboration; a unified approach; acting reasonably and responsibly; and where agreement cannot be reached through negotiation, parties should consider third party mediation.
  • Tenants should be transparent about why they need assistance and be prepared to provide financial information to landlords in order to support their request for financial relief.
  • Landlords are asked to consider their existing (potentially very good) relationship with the tenant and also be mindful of the likely pressures that tenants will be facing.
  • Any new arrangement agreed to by landlord and tenant should protect against forfeiture for non-payment of rent under the previous lease terms.
  • Landlords should review their service and insurance charges and reduce them where it is “…practicable and consistent with providing best value for occupiers.”
  • Landlords and tenants might enter into alternative rent arrangements and these include: full or partial rent-free periods; rent deferral; landlords waiving contractual default interest on unpaid rent; and tenants and landlords agreeing to split the cost of any time the premises was unoccupied over lockdown.

To see the government’s code in full please go to https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector/code-of-practice-for-commercial-property-relationships-during-the-covid-19-pandemic

Summary

The new code offers important guidelines. The content should be noted by landlords and tenants of commercial property alike. For many landlords the content will amount to common sense and amounts to guidelines designed by government to encourage participants in the UK’s commercial property market to negotiate and consider alternatives to litigation. It remains to be seen how useful a voluntary code such as this will actually be, even in the short to medium term.

With the current moratorium preventing forfeiture, CRAR, statutory demands and insolvency proceedings, at least for now landlord options are more limited than prior to the pandemic. Some alternatives remain viable. In particular, where a party is in breach of the lease and attempts to resolve disputes (including as proposed in the guidelines above) fail, money claims continue to be issued without delay. These claims are not subject to a moratorium or stay and allow the lease to continue in the meantime. Judgments can be enforced either in due course or immediately against rent deposits and/or guarantors (and guarantor assets).

If you are a landlord of commercial property and are facing non-payment of rent we are available to discuss your circumstances and how we might be able to help. Simply email [email protected] or call 01273 761990.

Contact Helix Law on 01273 761 990 or email: [email protected]