On 19th June, the Government announced a ‘Code of Practice for commercial property relationships during the Covid-19 pandemic’ to assist commercial property landlords and tenants.
Steven Percy, Partner at Stockport law firm SAS Daniels, explains some of the key takeaways for both landlords and tenants of commercial properties to consider in the new Code of Practice.
During the unprecedented economic disruption caused by Covid-19, many commercial tenants have had to approach landlords to discuss rental terms. This in turn has put pressure on landlords with many portfolios subject to loan repayments and/or ongoing maintenance costs, etc. The result: a very dissatisfactory and worrying position for all parties.
Kathryn Clare, Dispute Resolution Associate at SAS Daniels, has written previously on the moratorium on forfeiture of commercial leases, but this will at some point cease and the Code is seen to be a stepping-stone to reach that point.
Key Points of the Code of Practice to Consider
Outlined below are the key points of the Code summarised for commercial property landlords and tenants to consider:
- It is a voluntary code, seen to be best practice but does not act to vary existing contractual terms
- The Code applies to all commercial leases held by businesses in all sectors if affected by COVID-19
- Landlords and tenants are encouraged to liaise with lenders and finance providers to seek support where available and where appropriate
Transparency and Collaboration:
- Landlords and tenants must work together collaboratively in agreeing a shared recovery plan (this may be temporary or permanent and may or not mean rent deduction, deferment or other flexibility)
- Tenants should be transparent in providing financial information if rent concessions are required. Similarly, landlords should provide a reasonable explanation of any refusal to accommodate a tenant request for a rent concession
- Landlords should provide support to tenants where reasonably possible having regard to their own financial commitments and duties
Types of concessions that could be agreed include:
- Rent-free period
- Deferral of rent
- Payment of monthly rent rather than quarterly
- Revised rent to mirror current market rate or to reflect proportion of tenant turnover
- Landlords drawing arrears from rent deposits without requiring top-up
- Reduction in rent
- Landlords waiving contractual default interest
- Agreeing to split the cost of rent for any unoccupied periods
- Any of the above in return for removal of break clause or an extension of the lease
Service and Insurance Charges:
- Service charge and insurance charges, unless otherwise agreed, are to be paid in full.
- Service Charges should be reduced to reflect any periods of vacancy but landlords may see increased management costs for multi-let units in ensuring health and safety measures are in place.
Key principles of the Code:
- Transparency and Collaboration
- A Unified Approach
- Government Support
- Acting Reasonably and Responsibly
The new Code of Practice for commercial property relationships is available in full from the government website.