Victoria Walton, Partner, Commercial Property

Code of Practice for the Commercial Property Sector – Will it be enough?

04
Jul

The government has introduced a new code of practice which aims to provide clarity and reassurance to commercial landlords and tenants over outstanding rental and service charge payments and to encourage both parties to work together to protect viable businesses during the pandemic.

Developed by a working group of those in the commercial rental sector, the code will apply across the whole of the UK until 24th June 2021 and covers all sectors, including offices, retail and hospitality.  Critically, however, compliance with the code is not mandatory.

The key takeaways from the code are set out below.

 

Four Principles

The code is based on four central principles:-

  • Transparency and collaboration
  • A unified approach
  • Government support
  • Acting reasonably and responsibly

 

Not legally binding

Compliance with the code is entirely voluntary at this time and does not therefore change the underlying legal relationship or lease contracts between landlord and tenant.  It is simply intended to reinforce and promote good practice between both parties as they each deal with income shocks caused by the pandemic.

 

Tenants should pay in full if they can

Because the legal position remains unchanged, tenants are still liable for all covenants and payment obligations under the lease (unless this is renegotiated by agreement with landlords) and the code makes it clear that tenants who are in a position to pay in full should do so.

Tenants who are unable to pay in full should seek agreement with their landlord to pay what they can and, applying the four principles outlined above, landlords should support their tenants where reasonably possible.

 

Agreeing concessions

Tenants seeking concessions should be clear with their landlords about why this is needed and provide financial information about their business (“to an appropriate and relevant extent”) if requested by the landlord.  Tenants should also be prepared to make reasonable concessions of their own e.g. offering reversionary leases or extended terms in return for rent deferment).

Landlords should provide concessions where they reasonably can and landlords seeking to refuse concessions should be clear with their tenants about why they are doing so. This means providing a reasonable explanation of their decision which clearly takes into account the information provided by the tenant.

 

Practical options

The code provides a number of suggestions for ways in which landlords and tenants might be able to move forward with their negotiations and reach an agreement which is mutually acceptable to both parties.  These include:-

  • 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.

 

Service Charges

Service charges should be reduced where lack of use of a property during the lockdown period has lowered the costs incurred by the landlord and this reduction should be passed on to tenants as soon as possible, notably ahead of the conventional year end reconciliation, in order to help with cash flow and business viability.

 

Whilst landlords and tenants across the UK will no doubt welcome some guidance as to their respective rights and obligations during this unprecedented time – particularly after what is now a full quarter of non-trading for many businesses – there is still some doubt over whether this voluntary code goes far enough to have any real impact and to achieve the government’s ultimate goal of protecting viable businesses.  After all, the code is not a statutory instrument and is not legally binding.  Will this collection of recommendations and best practice guidelines really be the key to unlocking stalled negotiations and encouraging those parties who have not already succeeded in reaching a mutually satisfactory agreement to go ahead and do so? 

There are certainly some reasons to be hopeful.  The code has been widely endorsed by a number of leading organisations and representative bodies within the commercial property sector – including The British Chambers of Commerce, the British Property Federation and RICS – and, given the weight of its industry backing, individuals may think twice about ignoring it altogether. 

It is also possible that, for any party who is unwilling to enter into good faith negotiations or to consider any reasonable concessions, the very existence of the code may be enough to weaken their position in any future court proceedings where the conduct of the parties is a consideration if it is shown that they did not act in accordance with the guidelines.

As with so much at the moment, only time will tell. 

 

If you require any further advice in respect of the code or assistance in documenting any agreed variations to payment obligations in your lease, please contact Victoria Walton by email at vew@swinburnemaddison.co.uk or by telephone on 0191 384 2441.

 

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