New code of practice for commercial property landlords
Lisa Robinson, Partner in Coodes Solicitors’ Commercial Property team, explains the new code of practice for commercial property landlords.
The Government has introduced a new voluntary code of practice for commercial property landlords. The aim is to encourage best practice and to provide clarity for all businesses when discussing rental payments and agreeing new payment arrangements.
The code applies to all commercial leases held by businesses which have been seriously impacted by the coronavirus pandemic until 24 June 2021. These include businesses in the hospitality, retail, leisure, industrial, logistic and agricultural sectors.
The code does not change the existing legal relationships and lease contracts between landlord, tenant and guarantor, or existing payment arrangements made in response to Covid-19.
What are the principles of the code of practice?
The code introduces four basic principles, which must be followed by landlords and tenants:
1. Transparency and collaboration
Both landlord and tenant must act reasonably, transparently and in good faith. For example, tenants seeking rent concessions should be clear with the landlords about why this is needed.
Landlords should provide concessions where they reasonably can. Landlords seeking to refuse concessions should be clear with their tenants as to why they are doing so. This means providing a reasonable explanation of their decision, which clearly takes into account the information provided by the tenant.
2. A unified approach
Both the landlord and tenant will endeavour to help and support each other in all their dealings with other stakeholders including the Government, utility companies, banks and financial institutions.
3. Government support
Where the landlord and tenant have received Government Covid-19 related subsidies or relief, such as through the Job Retention Scheme, Business Rates Relief or VAT deferral, such support is recognised as being provided to help the businesses meet their commitment.
4. Acting reasonably and responsibly
Both landlord and tenant will operate reasonably and responsibly having recognised the impact of Covid-19 to come to a mutual solution.
There will be cases in which landlords and tenants have followed these principles but have been unable to reach an agreement. However, both parties may still consider that a negotiated outcome is still achievable and therefore a third party mediator could be employed.
Considerations when re-negotiating rent and payment plans
There are a number of key points for landlords to consider if a tenant requests to re-negotiate their rent. Considerations include the closure period and ability to trade via other means, the duration and extent of restrictive trading due to social distancing requirements, and any extra costs the business has had to meet to protect customers.
Landlords should also consider the needs of other stakeholders, such as banks, employees and suppliers, and keep in mind the tenant’s previous track record under the lease terms and any previous concessions agreed. Also, whether Government support has been received and how it has been used, as well as the impact that providing support may have on the tenant’s competitors and on other support already offered to tenants.
Landlords and tenants may also negotiate rent payment plans such as:
- 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
- Payment of rents over a shorter payment period for a set time, e.g. monthly rather than quarterly
- Rental variations to reduce ongoing payments to a current market rate
- Landlords drawing from rent deposits on understanding that the landlord will then not require the deposits to 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
- 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 reaching the trigger point of particular circumstances
- Tenants and landlords agreeing to split the cost of the rent for the unoccupied period between them
Services and insurance charges
The Government recognises that buildings must continue to be insured and safely maintained. Therefore, any service charge and insurance charge payable under the lease is non-profit making unless otherwise agreed and needs to be paid in full. This may have an impact on the tenant’s finances. Suggestions have been put forward by the code:
- These should be reduced in accordance with how a lack of use of a property has lowered the service charge cost
- There may be additional service costs required in order to operate a building which complies with health and safety requirements in respect of Covid-19, or recommissioning when buildings are re-opened
- Where possible, landlords should ensure that service charge costs are reduced, consistent with providing best value for occupiers
- Where possible, the frequency of the tenant’s service charge payment should be spread over shorter periods, e.g. monthly rather than quarterly
- Known net reduction in overall service charge due to lack of use of the property, taking into account any Covid-19 related costs, should be passed onto the tenant as soon as possible ahead of the end of year reconciliation in order to help cashflow and business viability
- Landlords should ensure that all management fees reflect the actual work carried out in managing the services and the service charge during Covid-19 crisis