What has the Covid-19 Code of Practice achieved?

On 19 June, the UK government published a Code of Practice for commercial property relationships during the Covid-19 pandemic, a voluntary set of principles to encourage transparency and collaboration between landlords and tenants of commercial property. At the time of its introduction, many commercial tenants had failed to pay their March quarter’s rents and the June quarter day was swiftly approaching.

The Code aimed to provide clarity on the payment of rents during the crisis, following the restrictions imposed on landlords by the Coronavirus Act 2020 and the proposed changes to insolvency law. But what impact has the Code really had on conversations taking place between landlords and tenants? Three months on, we look at whether the provisions of the Code are being put to use, or if the Code falls short of expectations.

Key provisions of the Code

The Code was designed to “support businesses to come together to negotiate affordable rental agreements”. Its main provisions are as follows:

• It confirms that tenants remain liable to comply with their payment obligations and other covenants under their leases. Tenants who can pay in full should do so and, if they are unable to do so, they should communicate with their landlord with a view to reaching an agreement and pay what they can.
• The parties should be transparent about their positions and exchange financial information to explain their proposals on proposed rent payments. Landlords should be prepared to make concessions where they reasonably can, having regard to their own financial commitments and fiduciary duties, and provide clear reasoning for any refusal.
• Where government support has been provided to businesses (whether landlord or tenant), this support is intended to help meet the costs of maintaining their business – which may include rent.
• Tenants are encouraged to prioritise paying service charges and insurance in full so far as possible.
• Suggested “new” arrangements for the parties to consider include:
• A rent-free period or deferral of rent payments
• Varying rent payment dates (eg monthly rather than quarterly)
• Varying the amount of rent (either by way of a reduction, or providing for all or part of the rent to be paid as a proportion of turnover)
• A landlord drawing down on a rent deposit, but not requiring the tenant to top up the balance
• A landlord waiving interest on unpaid rents or rents paid in arrears.

The Code aimed to encourage transparency and collaboration between landlords and tenants so that parties act reasonably and responsibly to identify mutual solutions, while recognising the impact that Covid-19 has had on businesses’ finances. The overarching message suggested a spirit of “we’re all in this together”, but it may be difficult to achieve this result where there is an intransigent party – whether landlord or tenant.

Impact on negotiations between landlords and tenants

Many landlords have been seeking to engage actively in discussions with their tenants about meeting their lease obligations since the crisis hit in March. At that point, landlords had limited options for alternative action – given that forfeiture was prohibited by the Coronavirus Act 2020 and the official UK lockdown implemented on 23 March made it difficult for enforcement agents to achieve the access needed for commercial rent arrears recovery.

The reality in practice – as recognised by the Code itself – was that most negotiations regarding the repayment of rent arrears took place in the immediate aftermath of the UK lockdown and the March quarter, ie during April and May 2020. The provisions of the Code were introduced far too late to form part of those discussions and many parties managed to reach an acceptable agreement before the June quarter based on similar arrangements to those listed within the Code.

Therefore, the Code’s suggested “new” arrangements were hardly new and were already being adopted by landlords and tenants well in advance of its introduction. This is supported by the feedback we have sought from those who are engaged on such matters – with the overwhelming majority confirming to us that the Code has made little or no difference to landlord and tenant negotiations. Indeed, as it became apparent during the early months of the pandemic that its effects were not going to be confined simply to the March quarter, parties often took the opportunity to address future payment obligations as part of their agreements. As a result, some landlords and tenants found that they had fewer issues with payment of the June quarter’s rents.

However, there remain landlords who are not open to negotiation and tenants who have maintained a “radio silence” approach since the crisis hit, with the latter knowing that the restrictions on forfeiture introduced in the 2020 Act protect them from losing their lease at present. For these parties, the Code has proven to be a valuable catalyst to kickstart and encourage dialogue. For example, a number of landlords have now written to their tenants to remind them of the principles of the Code, request details of any government support they have received in connection with the crisis and encourage them to put forward proposals concerning their payment obligations, together with financial information to support those proposals.

While it is helpful that the Code encourages parties to exchange financial information in order to support their negotiations, it remains the case at present that neither party is obliged to respond to such requests. Without consequences for failing to comply with the Code, there is a feeling that the guidance lacks teeth. However, we are yet to see how the Code will be treated by the courts.

Given that the Code is designed to offer tools to ensure that “best practice becomes common practice” and that its voluntary status is similar to a pre-action protocol within the Civil Procedure Rules, failure to comply with its provisions could be treated similarly. It is certainly likely to be deployed in arguments over costs in circumstances where parties’ negotiations fail and the landlord takes action to recover arrears owed, whether through court proceedings or otherwise. In such circumstances, it seems probable that the court will use the Code’s guidance to determine whether either party has acted unreasonably and then take that into account when costs liability is determined.

What does the future hold?

While it is understandable that the government wishes to promote a message that landlords and tenants are partners rather than potential opponents, the pressures on both sides are increasing – as it becomes ever more likely that Covid-19 is not going to disappear quickly and that the commercial property sector will continue to be impacted for quite some time. Landlords are particularly concerned as to how exposed they may become as insolvencies increase.

The Code is expected to remain in place until 24 June 2021, but it has been suggested that it might be more appropriate for it to be made mandatory in order to encourage greater cooperation between landlords and tenants. In surveys we have conducted, just over half of respondents agreed with this view. However, there would be obvious difficulties with this, not least due to the diverse range of business tenants and landlords intended to be covered by the Code. This makes it difficult for a “one size fits all” approach to work, given that the Code currently applies across all commercial property sectors including offices, retail and hospitality. The current approach – publicising the Code as best practice and leaving it for the courts to apply penalties for non-compliance in terms of costs – may well be a more appropriate compromise.

In the meantime, parties continue to look at alternative options. In a recent move to try to secure the survival of their respective business interests, landlords, shops and restaurants have joined forces to lobby the government for “Property Bounceback Grants”. The proposal has been put forward by the British Property Federation, the British Retail Consortium, Revo, UK Hospitality and UK Active, seeking for the government to fund up to 50% of rent and service charges owed by businesses in retail, hospitality and leisure. Such grants would be conditional on the relevant landlord and tenant agreeing arrangements between themselves for payment of the remaining 50% in accordance with the Code and so could again encourage parties to comply with its guidance.

This article was first published in Estates Gazette on 14 September 2020 and was written by Partner Emma Humphreys and Associate Emma Preece. For more information, please contact Emma Humphreys, Emma Preece or your usual Contact within the real estate disputes team at Charles Russell Speechlys LLP.