Government code published for commercial property arrears during COVID-19
The government announced at the end of May that it was working with certain businesses and trade associations to produce a code of practice to support high street businesses through coronavirus. The code has now been published in preparation for the next quarter on 24 June 2020 and it is intended to remain in place for a year.
The code applies to commercial property and aims to facilitate discussions between landlords and tenants by “communicating best practice and presenting a unified approach”. However, its approach may be of limited use given that it is merely voluntary, there is no intention to alter existing legal arrangements and the majority of the guidelines simply confirm the approach which most landlords and tenants are already adopting, namely to try to negotiate alternative rent arrangements. No doubt to counter this potential criticism, the publication of the code was accompanied by a government announcement that the restrictions on options such as forfeiture, CRAR and winding-up petitions were being extended until 30 September. (These restrictions have, of course, been extended again since then.)
Key elements of the code’s guidance
Despite the inevitable limitations of the code, there are some elements which may help to support parties as they continue to progress discussions in preparation for the June quarter. In particular, the code:
- Reminds tenants that rent is one of the costs for which government support has been provided to businesses;
- Suggests that tenants should prioritise paying service charges and insurance in full so far as possible, with landlords to review the extent to which service charges should now be varied according to how the use of the property has changed during the current crisis;
- Encourages parties to act reasonably, transparently and in good faith, including by providing financial information to justify their position on proposed rental payments (where appropriate and relevant); and
- Accepts that landlords will need to take into account their own financial commitments and fiduciary duties, where applicable.
The code repeats the guidance already circulated by the government that those tenants who can afford to pay their rent should do so, or at least pay what they can (taking into account the alternative financial resources which may be available to them). The code emphasises that payments by these tenants are part of the solution to help landlords to support those tenants who are in greater need, as well as to maintain the development activity which will contribute to the UK’s economic recovery.
The overall approach seems to reflect recognition by government that the support offered to businesses needs to be proportionate and targeted, with particular mention of the difficulties for those in the hospitality, leisure and retail sectors. The code encourages tenants “experiencing temporary severe hardship as a result of the impact of coronavirus” to approach their landlords to discuss a request for support.
Likely areas of concern
Parties are likely to be disappointed that the example rental arrangements set out in the code are nothing new, e.g. rent deferrals, monthly rents, or a rent-free period in return for the removal of a break option. Moreover, tenants will note that the code does not suggest that all requests for flexibility should be accommodated; a landlord is entitled to review the details of the tenant’s position and to make an assessment as to whether or not this is a temporary situation which might be accommodated and alleviated through some temporary adjustment to the tenants’ lease obligations.
The code contains a list of factors for parties to bear in mind in assessing the extent to which a tenant’s financial position has been impacted by the pandemic, including any extra costs involved with protecting customers, how any government support has been used and the tenant’s previous track record in adhering to its lease.
Some landlords will be concerned to see that there is still no specific financial support for landlords within the sector; only encouragement to engage with their lenders to seek flexible support in relation to their existing financial arrangements. Equally, there is no concrete reassurance for landlords that they will not be prejudiced in any subsequent insolvency situation by accommodating their tenants’ needs and delaying the implementation of recovery action.
The government will monitor how the code works in practice and has indicated that it may be prepared to intervene further. However, the new code points out that the measures which have been taken to restrict landlords’ options for arrears recovery and give a breathing space to tenant businesses cannot last forever and all parties are encouraged to work together “on a plan for a sustainable future”.
Please note: This briefing note is intended to be a general statement of the law and legal advice should be taken on your specific circumstances.
Please don't hesitate to contact Emma Humphreys or any member of the Real Estate Disputes team if you have any queries.
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