On 19 June 2020, the government published the ‘Code of Practice for commercial property relationships during the Covid-19 pandemic’.
Whilst the Code is voluntary, it aims to support parties in negotiating affordable rental agreements and tries to promote best practice amongst landlords and tenants.
The Code applies to all commercial leases held by businesses which have been seriously negatively impacted by the Covid-19 crisis.
It is important to note that a tenant’s legal obligation to pay rent and comply with tenant covenants in the lease remain, unless an agreement is reached with the landlord. If a tenant can pay their rent in full, it is clear that they should continue to do so.
However, where a tenant is unable make full payments of rent, the Code provides some guidance of how a landlord and tenant should approach this situation.
The Code encourages collaboration between the landlord and the tenant, recognising that it is in both their interests for the tenant’s business to continue trading from the property during a recovery period.
A tenant who cannot afford to pay their rent is encouraged to approach their landlord to seek a temporary agreement/concession to assist them whilst they transition through a recovery period. The Code recognises that the relationship between each landlord and tenant is different, but states that each party should act in good faith, reasonably and flexibly. This can include a tenant being transparent about why they need a concession, including providing financial information where necessary, and a landlord ensuring they clearly explain the reasons for any refusal.
Possible arrangements suggested by the Code include:
- A rent-free period for a set period of time;
- A reduced rent for a set period of time;
- A deferral of the whole or part of the rent for a set number of rent payment periods;
- All or part of the rent to be paid as a proportion of the turnover of the site, incorporating any period during which the site was closed;
- Landlords drawing from rent deposits on the understanding that they do not need to be topped up by the tenant until it is realistic and reasonable to do so;
- Landlord’s waiving contractual default interest on unpaid rents; and/or
- Rents being paid in arrears rather than in advance to make payment plans more affordable.
The Code also considers service charge and suggests that, where there is a known net reduction in overall service charge due to the lack of use of a property, this reduction should be passed on to the tenant as soon as possible in order to assist with cash flow.
It is clear that the government are encouraging cooperation and collaboration between landlords and tenants in order to help as many businesses as possible survive the impacts of the Covid-19 crisis and to ensure properties remain occupied.