Ahead of the June quarter day, the government has published a new Code of Practice (Code) for commercial landlords and tenants and extended a number of measures including the forfeiture moratorium until 30 September 2020.
The temporary Commercial Rent Arrears Recovery (CRAR) changes are extended similarly, and will now prevent CRAR unless at least 189 days’ rent is outstanding.
The government has announced:
- An extension to the moratorium on forfeiture of commercial leases for non-payment of rent. The moratorium was due to expire on 30 June 2020 but this will now be extended to 30 September 2020.
- It will prevent landlords using CRAR unless they are owed 189 days' of unpaid rent. The time period for which this measure is in force will be extended to 30 September 2020.
- An amendment to the Corporate Insolvency and Governance Bill (Bill) which is currently working its way through Parliament, which will extend the temporary ban on the use of statutory demands and winding-up petitions where a company cannot pay its bills due to COVID-19 until 30 September 2020. It is anticipated that the Bill will receive Royal Assent imminently.
The measures do mean that landlords’ remedies against tenants for unpaid rent will continue to be significantly restricted for the next 3 months. See recovery of arrears (published before the extension until 30 September 2020).
THE CODE: TRANSPARENCY, COLLABORATION AND PROTECTION OF VIABLE BUSINESSES
The Code aims to help facilitate a fair and transparent discussion between landlords and tenants over rental payments. The Code sets out expectations that landlords and tenants should share the costs and risks arising from the COVID-19 pandemic in a measured way.
The Code's objective is to facilitate a speedy recovery and to protect viable businesses.
According to the Communities Secretary, Rt Hon Robert Jenrick MP: "it will help unlock conversations on rent and future payments whilst ensuring best practice is displayed across the board as we confront the challenges of this pandemic".
- The code is voluntary. It does not affect the contractual relationship between landlord and tenant. It does not override or alter arrangements which have already been put in place.
- It applies to all commercial leases held by businesses in any sectors which have been negatively impacted by the COVID-19 crisis, although it is likely to be of greater significance for landlords and tenants operating in the retail and hospitality/leisure sectors.
- It seeks to build upon the discussions already taking place between landlords and tenants and to ensure that best practice becomes common practice.
- The Code includes a list of principles to be respected such as transparency, collaboration and acting reasonably and responsibly. It also provides potential arrangements between the parties such as the deferral of the rent, reductions in rent or the waiver of contractual default interest on unpaid rent.
- It has been endorsed by a number of industry bodies and organisations (British Chambers of Commerce, British Property Federation, British Retail Consortium, the Commercial Real Estate Finance Council, Revo, the Royal Institution of Chartered Surveyors and UK Hospitality).
- It is a temporary measure applied across the United Kingdom and will apply to 24 June 2021.
- The government has stated "the transition back to normality will take time and government will continue to monitor the economy to determine whether further intervention is necessary".
- It strongly encourages parties to work together collaboratively, reasonably and responsibly, and to formulate a "shared recovery plan". Mediation is suggested where parties have been unable to agree but it is felt that a negotiated outcome could still be achieved.
- 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.
- The Code notes that parties may wish to seek legal advice when agreeing payment arrangements. This is strongly advised: see Landlord considerations on rental concessions for the main issues to be considered.
- It has received a mixed reaction from landlords and tenants.
KEY PROVISIONS IN MORE DETAIL
- Rent arrears: The Code states that “it remains the case that tenants remain liable for rent arrears, unless this is renegotiated by agreement with landlords”. It adds, “tenants who are in a position to pay in full should do so, and tenants who are unable to pay in full should pay what they can” (although perhaps this should now be considered in the context of landlords currently having reduced options available to them to secure payment). Similarly, landlords should support affected businesses where they can afford it. Not all will be in the same position as they previously were in terms of ability to pay rent and it may be in the interests of both parties to reach a new temporary agreement.
- Rent payment changes: The Code makes it clear that those who can pay the rent should do so and that tenants seeking a rental concession must provide the financial information to demonstrate why relief from rent (s) is necessary. Tenants need to be transparent and justify their claims to assistance, for example, demonstrating they have already made use of the business assistance schemes introduced by the UK government and that they would be viable but for the COVID-19 lockdown.
The Code provides for a rent payment plan to be drawn up which then operates to protect the tenant against forfeiture. If an agreement cannot be reached there is a mechanism which provides for a third party mediator to be employed by mutual agreement to “help facilitate negotiations”.
Landlords, when considering a tenant's request, should bear in mind the closure period impacting the tenant’s business/ability to trade via other means/the duration and extent of restricted trading due to social distancing requirements/the tenant's previous track record/concessions already agreed/government support/extra costs and obligations through protecting customers to adhere to social distancing requirements/needs of other stakeholders (e.g. banks, employees and suppliers and the impact that providing support may have on the tenant’s competitors and on other support already offered to tenants.
Landlords should provide concessions where they reasonably can, taking into account their own fiduciary duties and financial commitments. Landlords refusing to give concessions should be clear with their tenants why they are so doing.
- Service charges: The Code advocates for full payment of service and insurance charges and maintains that these should continue to be payable. The Code does envisage that costs should be lowered where the lack of full use of the property means running costs are lower than what would usually be the case. The Code also considers the increased operating costs for COVID-19 compliant buildings, for example, additional costs for complying with extra health and safety legislation and suggests where possible, that service charge costs should be reduced where practicable and consistent with providing best value for occupiers, and payments spread over shorter periods. Any solution the parties reach in relation to service charge should take into account the RICS Professional Statement Service Charges in Commercial Property, 1st edition, and RICS guidance in relation to service charges and COVID-19.
The Code provides a number of practical suggestions as to the options available to parties to agree payment arrangements. These include (although the Code makes clear that these are not exhaustive):
- 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.
- The payment of the rents over shorter payment periods for a set time (e.g. monthly rather than quarterly) including provision for their payment in arrears.
- Rental variations to reduce ongoing payments to a current market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site, incorporating any period during which the site was closed.
- Landlords drawing from rent deposits on the understanding that the landlord will not then require that the deposits 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 and owned by the landlord, as part of a negotiated agreement applying to a portfolio of units.
- 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 on reaching the trigger point of particular circumstances.
- Tenants and landlords agreeing to split the cost of the rent for the unoccupied period between them.
- Any of the above in return for other arrangements e.g. a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, or an extension of the lease.
The Code does appear to have considerable industry backing with Melanie Leech, Chief Executive, British Property Federation stating: "The majority of property owners and occupiers are already working well together, creating shared solutions to mitigate the impact of coronavirus on their businesses. The code … builds on the many examples of good practice and reinforces the importance of constructive collaboration – not only over the next few months and once the government’s temporary legislative interventions come to an end later this year, but for the long term";
Helen Dickinson, Chief Executive, British Retail Consortium: "The ongoing pandemic presents an enormous threat to the survival of thousands of retailers, and the millions of jobs they support" and, "This code is a first step toward improving the dialogue between retailers and their landlords. An extension to tenant protections against aggressive behaviour from some landlords is essential to underpin it, and we warmly welcome the government’s commitment to this",
but "all parties should recognise that the code does not provide a solution for those retailers who are simply unable to pay what is being demanded, and we now look forward to continuing our constructive dialogue with government and other parts of the property sector to address these unpayable rents. Without further action, both retailers and landlords remain in a precarious situation that could lead to substantial numbers of redundancies as soon as tenant protections expire".
LENDER SUPPORT FOR COMMERCIAL LANDLORDS
Government intervention to date, has largely assisted commercial tenants but it does not detract from the fact that there are landlords who are struggling. UK Finance has confirmed its members’ continued support for commercial landlord customers including amendments to facilities and capital payment holidays stating: "Those commercial landlords who are concerned about making loan repayments or require financial assistance during this time and who have not yet been in contact with their lenders should do so through the usual channels" and "banks and finance providers will treat customers sympathetically and will consider their circumstances on a case-by-case basis".
For many landlords, the introduction of the Code is unlikely to materially change the status quo, as they have already been proactively working with their tenants to find ways to restructure rental payments to assist in the short to long term, including agreeing re - gears, rent deferments, rent reductions and rent holidays. However as the June quarter day looms, many landlords are anxious.
One significant concern for landlords is protection from enforcement action by lenders if they are unable to service their debt due to tenants defaulting. The Code does not address this. Some comfort has been given by UK Finance in its statement above but no formal measures have been introduced by the government.
It is hoped that the Code will assist both landlords and tenants by giving them a structure for their discussions to navigate the effect of the COVID-19 pandemic and to follow the principles outlined in the Code. Time will tell whether the Code gains traction and momentum in the industry.