Code of Practice for Commercial Property Relationships During the Pandemic
In June, the government published a code of practice for commercial property relationships during the COVID-19 pandemic (a link to the Code is available here) containing a number of principles to which landlords and tenants should adhere to, to promote good practice amongst them, such as:
- Transparency and collaboration
- A unified approach
- Government support
- Acting reasonably and responsibly
Compliance with the Code and its principles is non-mandatory and this is not only its main feature, it also is the root of some discontent with its effect, amongst both landlords and tenants.
The code is nothing more than an acknowledgement that times are difficult and that it may not necessarily be possible for tenants to comply with their lease obligations, especially regarding the payment of rent. Landlords are encouraged to be flexible and accept different payment patterns or should consider waving parts or all of the rents payable. Examples are given in the Code as to how the gap of non-payment of rent could be bridged, such as through collection of rent deposits.
Insurance rent and service charges are specified as being of major importance to keep buildings running and therefore should continue to be paid as a matter of priority.
The Code is stipulated to apply to all commercial leases, which are held by businesses that have been seriously impacted by COVID-19, with the hospitality, leisure and non-food retail sectors likely to be affected most.
Why does the voluntary nature of the Code create such difficulties? First of all, it needs to be understood that most landlords and tenants have since the middle of March continuously negotiated and discussed how the situation can be improved to the satisfaction of both the landlord and the tenant. Many landlords have accepted moratoria on rents, waived or partly waived rent payments, renegotiated lease rents down or converted annual rents to turnover rent, even if temporarily. Neither landlords nor tenants really required the Code to enter into negotiations, as it is generally in the interest of both parties to find a solution to the issues that this crisis has brought with it.
The Code provides that a tenant should aim to give landlords as much information as possible (transparency principle) to enable the landlord to evaluate every tenant’s position individually. However, it is unlikely that tenants will disclose all financial information relating to their businesses and without this information it will be difficult, if not impossible for landlords to make informed decisions as to whether their tenants really require postponed rents or waivers. Some tenants may just make an opportunistic move to withhold rents for cash-flow purposes or to strengthen their position for a future renegotiation of the rental level or a reduction of the lease term. This is further fuelled by the effects of the Coronavirus Act 2020.
In April, David Wise, head of property litigation, published an article in relation to the practical implications of the Coronavirus Act 2020, which included a moratorium in respect of forfeiture of leases on the ground of non-payment of rent. Now, the government has announced that this moratorium is to be extended until 30th September 2020 and that the amount of rent which must be unpaid in order to serve a notice to recover commercial rent arrears (Commercial Rent Arrears Recovery Procedure CRAR) will increase from 90 to 189 days.
In addition, the Corporate Insolvency and Governance Act came into force in June and our corporate team has published a number of articles relating to the new Act and its effects on corporate filings and AGMs and on the suspension of wrongful trading etc., which restricts the use of winding up petitions. This further protects tenants in the case of non-payment of rents, to avoid landlords turning to insolvency proceedings when rents are unpaid.
It has been widely reported that 13% of June quarter rents have actually been paid by retailers, compared with 20% of March quarter rents. It is impossible to establish which of these rents could not be paid, and which simply have not been paid. The Code has done little to assist with this, and it is rather difficult to monitor who complies with it anyway, as non-compliance with the Code does not carry any penalties.
It needs to be noted that landlords could still attempt to recover rents as debts and if they have not been paid for two quarters, tenants can still be subject to recovery proceedings.
If any of these issues are starting to raise some questions for you then we are here to help. Please contact either myself or a member of the real estate team.