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New Code of Practice for Commercial Property Relationships

on Wednesday, 01 July 2020.

The aim of the new code of practice from the Government is to provide clarity for landlords and tenants when discussing rental payments and to encourage best practice to support all parties, so that the economy can recover swiftly.

We have written about the various protections that the Government has introduced for commercial tenants. The code supplements these protections, recognising the strain that the commercial property sector is currently experiencing.

The code that will apply until 24 June 2021, is only voluntary but the ministerial foreword indicates that it "represents a good starting point on our road to economic recovery". It's steering group included a number of leading representative bodies such as British Chambers of Commerce, the British Property Federation and the British Retail Consortium. It has since been supported by a number of other organisations including the Association of Convenience Stores, the British Beer and Pubs Association and the British Independent Retailers Association.

The code encourages landlords and tenants to work collaboratively to find temporary and sustainable arrangements "outside of the existing letter of their leases in order to create a shared recovery plan".

The Code's Principles

  • Transparency and collaboration - this involves parties acting reasonably, swiftly, transparently, flexibly and in good faith to aid a mutual interest in business continuity

  • A unified approach - this involves helping and supporting each other in all dealings with other stakeholders including Government, banks and utilities companies

  • Government support - where Government support has been provided, for example through the Coronavirus Job Retention Scheme, loans, grants, business rates relief or VAT deferral, the code acknowledges that this has been provided to help meet the costs of maintaining businesses and saving jobs - rent is recognised as one such cost

  • Acting reasonably and responsibly - this involves parties acting in a manner to recognise the impact of the pandemic and identify mutual solutions where they are most needed.

Where the principles have been followed but an agreement has not been reached between the parties, a third party mediator could be employed to facilitate negotiations.

What Do the Principles Mean in Practice?

  • Tenants who can pay their rent in full should continue to do so.

  • Tenants who cannot pay their rent in full should (a) communicate with their landlord and provide information, including financial information, to demonstrate why a concession is needed and (b) pay what they can.

  • Landlords should support tenants if they can and should consider a reasonable request by a tenant, considering whether a temporary arrangement might enable the tenant to survive. Landlords should give a reasonable explanation for a refusal to grant a rent concession.

  • The code includes a number of factors that a landlord should take into account when considering a tenant's request to renegotiate their rent including any closure period impacting the tenant's business, any extra costs incurred by the tenant to enable its customers to adhere to social distancing requirements, the needs of other stakeholders including banks, employees and suppliers and the tenant's previous track record under its lease.

Potential Options in Relation to Rent

The code identifies a number of options for the parties to consider:

  • 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 rent over a shorter payment period for a limited time, for example monthly in arrears
  • Rental variations to reduce ongoing payments and/or rent to be paid relative to turnover of the site
  • Landlords drawing on rent deposits without requiring the tenant to top them up before it is realistic and reasonable to do so
  • Landlords waiving their entitlement to charge interest

Service and Insurance Charges

The code recognises that it is important that buildings continue to be insured and safely maintained. As insurance and service charge rent will need to be paid in full, unless otherwise agreed, the code recognises that:

  • Service charges should be reduced where, in view of the lack of use of a property, the service charge costs are lower. Such reductions should be passed on to tenants as soon as possible to help with cash flow and business viability.
  • Landlords should reduce service charge costs so far as is practicable and consistent with providing best value for tenants.
  • The frequency of service charge payments should be spread over shorter periods where possible.

It is important that any agreed revised rental payment arrangements are documented to avoid any dispute at a later date as to the scope of the rent concession.

If you are a landlord or a tenant and would like to discuss your options regarding your lease, please contact Katie Hickman in our Real Estate team on 07557 528 936, or complete the form below.

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