The reason for the Code
On 19 June 2020 the Government published a new voluntary Code of Practice for the commercial property sector in the United Kingdom which will apply to healthcare landlords and occupiers. The Code intends to promote good practice amongst landlord and tenant relationships as they deal with the fall out from the COVID-19 pandemic. It is important to point out that the Code does not change the contractual relationship between the parties as set out in the lease but several leading industry bodes have endorsed it and the Code applies until 25 June 2021.
The Code highlights the importance of landlords and tenants working together collaboratively to reduce the impact of COVID-19.Tenants who are in a position to pay in full should do so, while those who are unable to pay in full should seek agreement with their landlord to pay what they can. Landlords should provide support where reasonably possible. There clearly may be benefit to both parties in reaching a short term agreement. The Code sets out a number of options on how to agree new rent payment arrangements.
The Code applies to all commercial leases across all sectors but clearly some healthcare businesses and services have been seriously impacted by a lack of demand and lockdown measures so this may be of real assistance. The Code sits alongside other measures, such as the moratorium on forfeiture of commercial leases and changes to Commercial Rent Arrears Recovery, statutory demands and winding up petitions, which provide tenant businesses the breathing space to work with landlords and other partners on a plan for a sustainable future.
The key principles
Transparency and collaboration:
Both parties have mutual interest in business continuity that reaches far beyond the extent of this pandemic. The Code states that landlords and tenants are economic partners, not opponents. Therefore, in all dealings with each other, the parties are encourages to act reasonably, swiftly, transparently and in good faith (subject to requirements of reasonableness as exist in any regulatory regime or in relation to legislation).
A unified approach:
Landlords and tenants should help and support each other in all dealings with other stakeholders including governments, utility companies, banks, financial institutions to achieve outcomes reflecting the Code’s objectives and help manage COVID-19’s economic and social consequences.
Where businesses (whether landlord or tenant) have received government COVID-19 related subsidies or reliefs (for example the Job Retention Scheme, loans, grants, business rates relief or VAT deferral), the Code recognises that this support has been provided to help businesses meet their commitments.
Acting reasonably and responsibly:
Landlords and tenants should operate reasonably and responsibly, recognising the impact of COVID-19, in order to identify mutual solutions where they are most needed. Where the parties cannot reach specific agreement, they may agree to use third party mediation (if the cost is proportionate) to help facilitate negotiations.
New rent agreements
The Code encourages both landlords and tenants to act in good faith, reasonably and flexibly as set out in the Code’s principles.
Tenants who require concessions must be clear with landlords as to why they are needed and must provide relevant financial information to back up this request. Landlords should provide concessions where they reasonably can, taking into account their own duties and commitments. If a landlord cannot agree a concession then it must provide a reasonable explanation.
There is a useful non exhaustive list of points for landlords to consider when reviewing a tenants request for a rent concession.
- Closure period impacting the tenant’s business, and ability to trade via other means;
- Duration and extent of restricted trading due to social distancing requirements;
- Extra costs and obligations through protecting customers to adhere to social distancing requirements;
- Needs of other stakeholders such as banks, employees, suppliers during this period
- Government support received and how this has been used;
- The tenant’s previous track record under its lease terms and any concessions to the tenant already agreed;
- The impact that providing support may have on the tenant’s competitors and on other support already offered to tenants;
- Possible alternative considerations in a regulated sector.
Agreeing and adhering to a new arrangement agreed to by both parties should protect against forfeiture (or irritancy in Scotland) for non-payment of rent under the previous lease terms (to the extent that the rent has been amended by the rent payment plan) after the Coronavirus Act 2020 moratorium on forfeiture (and similar measures in Scotland) is lifted and for so long as the rent payment plan applies. It should also apply to leases not covered by the moratorium (e.g. agricultural).
There is also a non exhaustive list of potential options which could be agreed between landlords and tenants, for example:
- a full or partial rent-free period for a set number of payment periods;
- a deferral of the whole or part of the rent for one or more payment periods;
- 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;
- reductions in rent, either in whole or part, across other units occupied by the tenant and owned by the landlord, as part of a negotiated agreement applying to a portfolio of units;
- landlords waiving contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable;
- provisions for ending the solutions on a fixed date, or on reaching the trigger point of particular circumstances;
- tenants and landlords agreeing to split the cost of the rent for the unoccupied period between them;
- any of the above in return for other arrangements e.g. a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, or an extension of the lease.
What about service charge?
The Code recommends that service charge and insurance costs continue to be paid by tenants in full. Buildings still need to be insured and maintained.
Landlords should bear in mind the following principles:
- Service costs should be reduced accordingly where the lack of use of a property has lowered the service charge costs incurred;
- It is acknowledged that in some cases there may be additional service costs required, e.g. in order to operate a building which complies with health and safety requirements in the context of COVID-19, or recommissioning where buildings are reopened;
- Landlords should ensure that service charge costs are reduced where practicable and consistent with providing best value for occupiers;
- Where possible, the frequency of tenant service charge payments should be spread over shorter periods;
- Where there is a known net reduction in overall service charge due to lack of use of a property (taking into account any additional COVID-19 related costs), this reduction should be passed on to tenants as soon as possible ahead of the end of year reconciliation in order to help with cash flow and business viability;
- Landlords should ensure that all management fees reflect the actual work carried out in managing the services and the service charge during the COVID-19 crisis;
- Any solution the parties reach in relation to service charge should take account of the RICS Professional Statement Service Charges in Commercial Property, 1st edition, and of all RICS guidance in relation to service charges and COVID-19
The Government interventions in the form of the moratorium on forfeiture of commercial leases and changes to Commercial Rent Arrears Recovery, statutory demands and winding up petitions cannot last forever. While the new Code is voluntary, it is intended to encourage a collaborative relationship between landlords and tenants to deal with the consequences of COVID-19 and perhaps to ensure a sustainable relationship in future. Even when lockdown measures start to be eased post 4th July there are still many businesses in the healthcare sector unable to operate as normal so the Code sets out some useful guidance and principles to assist in the ongoing dialogue between property owners and occupiers and perhaps shape the nature of their future relationship as we live with the consequences of COVID-19 for some years to come.
For more information on the article above please contact Ben Tarrant.