UK Government release “Code of Practice for commercial property relationships during the COVID-19 pandemic”
Businesses across the world are still coming to terms with the impact COVID-19 and desperately trying to minimise any long-term damage to trading. In terms of landlords and tenants, landlords face the challenge of having to continue to pay overheads such as service charge, loan payments, and insurance while their tenants are unable to pay their rent due to lack of income and forced closure.
So far, the UK Government, and the devolved parliaments and assemblies of the UK, have put in place various measures to mitigate the damage to businesses, such as the Job Retention Scheme and the Bounce Back Loan Scheme. The latest assistance offered by the UK Government for those who own or lease commercial premises is the publication of the “Code of Practice for commercial property relationships during the COVID-19 pandemic”.
The Code, backed by RICS, the British Retail Consortium, UK Hospitality, British Chambers of Commerce and the Federation of Small Businesses among others, is designed as a voluntary (and temporary (until 24th June 2021) guide to help landlords and tenants negotiate alternative lease arrangements. It applies to all types of commercial property across the UK, and hopes to assist parties reach mutually beneficial and sustainable solutions to the current business challenges presented by the pandemic.
Overall, the Code is designed to “reinforce and promote good practice” in order to assist with the shared recovery of both landlords’ and tenants’ businesses by supporting tenants in need, and maintaining development activity of landlords. It is expected that the Code will be of use to businesses which have felt the negative impact of COVID-19 the most, such as the hospitality, leisure and parts of the retail sectors.
The Code is underpinned by four main principles:
Transparency and collaboration
- When discussing potential options, landlords and tenants should be honest and open with each other and act as partners working together to maintain continuity of business.
- Tenants should be transparent about why they are seeking concessions and be prepared to provide financial information to support their request.
- Landlords should also be transparent with their tenants in giving reasons for their decisions.
A unified approach
- The parties should also support each other when dealing with stakeholders, such as utility companies, and local government.
- They should also be mindful of the needs of particular stakeholders.
- Government support is designed to help businesses (both landlord and tenant) meet their commitments, including rent and loan payments.
- Landlords and tenants should disclose they have each received when discussing options.
Acting reasonably and responsibly
- Parties are encouraged to deal with one another in a reasonable and responsible way so that they can develop mutually beneficial solutions.
- This can be done by considering the current circumstances and future prospects, as well as a tenants’ previous track record.
The Code contains suggested arrangements landlords and tenants can put in place centred around two main issues; rent and service charge as follows:
- Rent Rent-free periods;
- Deferred rent periods;
- Change to payment timescales i.e. moving from quarterly payments to monthly;
- Rent reductions, which may include a variation of the rent to the current market rate, or a variation to provide for turnover rent;
- Where landlords draw from a rent deposit, the tenant would not be required to top up the deposit funds before it is “realistic and reasonable”;
- Landlords waiving default interest on rent arrears;
- Landlords and tenants agreeing to split the cost of the rent for the period when the property is unoccupied.
Tenants should bear in mind that they are being encouraged to pay their rent in full when they are able to do so. They should also be prepared for the possibility that landlords may ask for the removal of a break option or a commitment to a longer lease term, in exchange for some of the arrangements suggested above.
- Service charge should be reduced in line with the reduced costs incurred due to lack of use;
- Any savings in overall service charge should be passed to tenants at the earliest possible opportunity, rather than at the end of year reconciliation;
- Management fees should reflect actual work carried out;
- Parties should bear in mind that many premises will need to be recommissioned and there may be operations costs in fitting out premises so that they comply with health and safety requirements e.g. installation of screens, availability of PPE and hand sanitiser, and increased cleaning.
Service charge often includes health and safety, compliance and insurance costs therefore it is important to ensure that these services are maintained so that properties are safe and fit for purpose. While the Code states that service charges should not be for profit, they should be paid in full, unless otherwise agreed.
Whatever arrangements the landlords and tenants agree on, when putting together a plan, both parties should consider how this will impact the long-term viability of their businesses. The goal with arrangements such as these is to support economic growth by keeping tenants and landlords in business.
If you have any questions or require any advice on the above, or on any commercial property matter, please contact our Commercial Property team.
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