Can good faith save UK commercial property?
On Friday 19 June, the Government published its new Code of Practice for the Commercial Property Sector.
On Friday 19 June, the Government published its new Code of Practice for the commercial property sector (“the Code”).
When COVID-19 struck in March, the Government imposed a moratorium on forfeiture for non-payment of rent (which is now due to expire on 30 September 2020) and urged commercial landlords and tenants to act reasonably and to negotiate with each other.
The Code sets out how the Government expects those negotiations to be conducted.
It will apply until 24 June 2021 across the whole of the UK. It is voluntary and sets out ‘best practice’. Nothing in the Code affects existing legal relationships between landlord and tenants, or with third parties.
It has been endorsed by trade bodies such as the British Chambers of Commerce and the British Property Federation.
The Code applies across all business sectors. However, the Government expects it to be of particular relevance to those areas which have been hardest hit such as the leisure and hospitality sectors.
The main principles of the Code are that:
- Tenants who can pay their rent in full should do so
- Tenants who cannot pay in full should communicate with their landlords and pay what they can
- Landlords who are in a position to support businesses in need should do so
The Code urges both landlords and tenants to:
- Act reasonably, swiftly, transparently and in good faith
- Support each other in dealings with third parties such as banks and utilities suppliers
- Recognise that any Government support already received (e.g. furlough payments) are intended to support all outgoings of the business, including rent
- Negotiate and consider ADR (alternative dispute resolution) where appropriate and cost-effective
Tenants seeking support from their landlords should explain why it is needed and provide supporting information. This may be provided on a confidential basis.
Landlords refusing to support their tenants should explain why. Some landlords may themselves be in financial difficulties and, if so, they should also provide evidence of this to their tenants.
Landlords should consider the impact of COVID-19 on each tenant’s individual business, by reference to factors such as:
- The length and impact of any closure of the tenant’s business
- The cost and impact of any social distancing measures
- Any Government support available to the tenant
- The tenant’s previous track record
The aim of every negotiation under the Code is to agree a concession agreement, provided that the tenant has established a case for a concession being given and the landlord is able to accommodate it.
Concessions that landlords are urged to consider offering may include:
- Full/partial rent-free period
- Rent deferral
- Rent reduction
- Rescheduling rent payments (e.g. quarterly to monthly; advance payment to payment in arrears)
- Use of a rent deposit to pay the rent, without requiring the tenant to top up immediately
- Waiver of landlord’s right to default interest
- Lease re-gear, i.e. a longer lease term or a removal of a tenant break option in return for a concession offered to the tenant
If the content of this update raises any issues for you, or you would like to discuss, please liaise with:
DDI: 0161 214 0659
DDI: 0208 036 6963
DDI: 0141 404 9313
DDI: 0151 243 9883