Coded messages for landlords and tenants

On 19 June 2020, the government published a voluntary Code of Practice for commercial property relationships during the Covid-19 pandemic – some three months after the first restrictions on landlords’ remedies for rent arrears were introduced. At the time, it felt too little too late as few foresaw that there would be two further lockdowns during the months that followed. One year on, what use has the Code been and what is it's likely future?

Background to the Code

By way of reminder, the Code primarily aims to facilitate discussions between landlords and tenants on the subject of rent arrears owed under leases of commercial property. It encourages transparency and collaboration and suggests potential arrangements as compromises for the parties to explore. Nonetheless, it also confirms that tenants remain responsible for their payment obligations, and that tenants who can pay should do so.

The courts’ view of the Code

Many felt the voluntary nature of the Code meant it would be ineffective support for contracting parties. Allegations about failure to comply with the Code were considered in both Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863 (Ch); [2021] PLSCS 74 and Bank of New York Mellon (International) Ltd v Cine-UK Ltd and other appeals [2021] EWHC 1013 (QB); [2021] PLSCS 80.

In TFS Stores, the tenant’s allegation that its landlord had failed to engage fully with the Code was rejected on the evidence. The High Court dismissed the tenant’s suggestion that the issue of the claim was contrary to the Code, noting that the Code “is not a charter for tenants declining to pay any rent”.

In Bank of New York, the tenants submitted that it was inconsistent with the Code for the landlord to insist on full payment and to be pressing for summary judgment. However, Master Dagnall disagreed that the existence of the Code – to which none of the claimant landlords had signed up – should oblige a landlord to negotiate or prevent it from obtaining summary judgment in a clear case, nor did he feel that the court should use its power to stay the claim to allow for negotiations. He noted that the government had not limited a landlord’s right to sue for rent and commented that:

“I regard the Code both as being outside the litigation process and not applicable to these Tenants who are not said to be unable to pay.”

These cases will concern those tenants who have still failed to engage with their landlords on the subject of their arrears, knowing that landlords’ most draconian remedies – forfeiture and commercial rent arrears recovery – remain off the table at present. It was perhaps logical for them to think the government’s protective measures would be reflected in the court’s approach to claims, but this is quite clearly not the case.

Has the Code been effective?

These cases and anecdotal evidence suggest the Code has not been widely followed, although it is fair to say that many of its suggested “new” arrangements were hardly new and were already being adopted by landlords and tenants well in advance of its introduction. At a recent webinar we hosted, we polled a number of surveyors and discovered that 95% had “never” or “rarely” experienced use of the Code. Only 5% of those we polled found the Code was “often” used.

In terms of how parties are continuing to approach their negotiations, 88% of our attendees confirmed that most parties were agreeing concessions, with 4% indicating that landlords were suing for arrears through the courts and 8% looking at other remedies (for example using rent deposits or guarantees). There is certainly plenty left to do given that estimates place current arrears at around £6bn.

Where are we now?

The government announced on 16 June 2021 that the existing measures in place to protect commercial tenants from eviction will be extended to 25 March 2022. Other restrictions on landlords’ remedies were similarly extended, including the ban on winding-up petitions for debts related to the pandemic (until the end of September 2022).

For businesses which have had to remain closed, legislation is to be introduced to ring-fence outstanding unpaid rent. There was no specific mention of the Code (which is due to expire shortly) in the government’s press release, but it seems that the proposed legislation will mirror elements of the Code by helping landlords and tenants work together to come to an agreement on the ring-fenced arrears. This may involve waiving some of the total amount owed or agreeing a longer-term repayment plan. However, a “binding arbitration” mechanism will be imposed if landlords and tenants cannot reach agreement by March 2022.

A binding mechanism to deal with pandemic rent arrears received support from 65% of those we polled. However, there will be obvious difficulties with drafting an appropriate process, not least due to the diverse range of business tenants and landlords affected.

As a wider matter of principle, many will also question whether the UK should risk becoming a jurisdiction where the government is willing to interfere with contracts concluded between commercial parties. As Master Dagnall noted in Bank of New York:

“In times of uncertainty the law must provide a solid practical and predictable foundation for the resolution of disputes and the confidence necessary for an eventual recovery… Legal certainty remains paramount and gives the surest basis for the resolution.”

A version of this article was originally published in the June edition of Estates Gazette. Since publication the Code of Practice has been extended and is due to be revised, in anticipation of legislation to follow. For more information please contact Emma Humphreys, Natalie Deuchar, Emma Preece and Claire Timmings or your usual Charles Russell Speechlys contact.