Decoding the UK government’s new Code of Practice for commercial property

Today the government has issued its Code of Practice for commercial property which is designed to set out principles of behaviour and responses to difficulties experienced by landlords and tenants as a result of coronavirus.

In addition to publishing the Code the Government has also issued a press release today (19 June 2020) which confirms that the existing protections for commercial tenants will be extended until 30 September 2020. Commercial landlords will note that this is likely to have an impact on rent payments for Q3. The announcements provide that:

  • the Coronavirus Act 2020 will be amended to extend the moratorium on forfeiture for non-payment of rent, this will prevent landlords from evicting commercial tenants for non-payment of rent in the next 3 months;
  • under current protections, monies owed to landlords must be equivalent to 90 days’ rent before landlords can exercise Commercial Rent Arrears Recovery – under new measures the value of unpaid rent that must be owing before CRAR can be used will be increased to 189 days. The government press release states that “the time period for which this measure is in force will be extended from June 30 to September 30”; and 
  • the Corporate Insolvency and Governance Bill (currently progressing through Parliament but yet to receive Royal Assent) provides for a temporary ban on landlords’ use of winding-up petitions and statutory demands where a company is unable to meet its liabilities as a result of coronavirus. An amendment was tabled this week which would extend the proposed time period for the temporary ban until 30 September. We note that the most recent form of Schedule 10 of the Bill does not yet refer to the 30 September date but expect the amendment will appear in the next iteration of the Bill issued.

Following on from our previous summary which evaluated the draft code from a landlord and lender perspective, the following summary note provides a breakdown of the key points contained in the now finalised and published version of the Code.

Is the Code binding?

No. The Code is voluntary however a range of property industry bodies (such as the British Property Federation and Revo) have worked with the Government to seek to shape the content and effect of the Code.

However, in a statement published on 29 May 2020 the Government has stated that it “will explore options to make it [the Code] mandatory if necessary.” The impact and effectiveness of the Code will therefore depend to a large extent on the number of organisations who commit to implementing it.

Does it undermine the legal obligations in a lease?

No. The Code is intended to embed good practice to encourage parties to leases to discuss and agree a sustainable way forward and in particular to support smaller businesses in negotiations by supporting “businesses to come together to negotiate affordable rental agreements”. The aim is not to ‘cut across’ or undermine contract law or to intervene in the commercial relationship between landlord and tenant but to encourage parties to agree “arrangements outside of the existing letter of their leases in order to create a shared recovery plan.”

Does the Code apply to all leases?

Yes. The Code is not restricted to business tenancies or any other types of tenancies; it applies to all commercial tenancies from retail to office to agricultural.

The Code also applies to the whole of the UK (so it not just restricted to property in England and Wales, but includes Scottish and Northern Irish property).

What are the primary requirements of the Code?

It is expected that tenants who are in a position to pay their full rent should do so and those who cannot pay the full rent but have some financial capacity should make partial payment. The Code acknowledges that the lifting of the restrictions on businesses trading does not necessarily indicate an ability to pay.

Equally, landlords who can provide support - having taken into account their own financial commitments, such as complying with the obligations to their lenders - should do so.

What are the central themes of the Code?

The Code emphasises that:

  • parties should act reasonably, swiftly, transparently and in good faith;
  • landlords and tenants should take a unified approach to support each other in dealings with other stakeholders such as government, utilities companies, banks and financial institutions;
  • where landlord or tenant businesses have benefitted from government schemes (such as the employee furlough scheme or a government backed loan), the purpose of providing that support is to enable businesses to meet their commitments, which includes those relating to property costs;
  • landlords and tenants should also engage with their lenders. The Code includes a link to a statement of support from UK Finance. The statement emphasises:
    • the importance of borrowers reaching out to their lenders; and 
    • that lenders are ready to provide flexible support to viable businesses and will treat customers sympathetically and consider their circumstances on a case-by-case basis; and
  • the current restriction on forfeiture for non-payment of rent and on the use of statutory demands and winding up petitions are temporary, exceptional measures do not undermine or permanently alter the law governing landlord and tenant relationships. Parties, therefore, should consider following the Code to come to an arrangement for the longer term to assist in allowing businesses to recover following the lockdown.
Does the Code address payment of costs other than rent?

Yes. The Code supports the full payment of service charge and insurance rent and recognises that buildings need to continue to be insured and safely maintained. The Code encourages tenants to prioritise paying those costs and also recommends that:

  • landlords consider what service charge costs should be charged based on the use of the property during lockdown - additional costs may have been incurred in relation to implementation of Covid-19 measures (enhanced cleaning requirements for example); and
  • any savings in the service charge, for example due to reduction in provision of services at premises that have not been occupied as a result of Covid-19, should be passed on to tenants prior to the end of the service charge year (this may contradict the requirements of a standard service charge provision in a commercial lease); 
  • where possible, service charge payment schedules are changed to allow for more frequent payments (for example switching from quarterly to monthly billing) in order to assist tenants with their cash-flow; and
  • parties take account the RICS Professional Statement Service Charges in Commercial Property, 1st edition, and of all RICS guidance in relation to service charges and Covid-19.
What rent payment plans does the Code suggest?

The Code lists a range of possible options (see paragraph 23 of the Code) which we consider fit into these categories.

  1. Rent payment changes: Changing the frequency of rental payments, deferring rent payments (supported by an agreed payback arrangement), or splitting the costs of rent for unoccupied periods.
  2. Rent free periods: Agreeing rent free periods on the basis of: (i) the tenant agreeing to extend the term of the lease; (ii) the removal of a tenant break right or (iii) agreement of an alternative concession to the landlord. 
  3. Interest: Landlords waiving the requirement to pay interest on late rent to make repayment plans more affordable for their tenants.
  4. Rent Deposit: Landlords withdrawing from a rent deposit deed without immediately requiring the tenant to top-up the rent deposit and landlords seeking to agree alternative top-up regimes.

The options set out in the Code are by way of suggestion only and parties may agree other arrangements that better suit their circumstances (for example, postponing a tenant’s break right rather than extending the term of the lease).

What should the parties consider when agreeing a rent payment plan?

1. Reaching agreement on a plan:

The Code emphasises that in order for the parties to agree an arrangement it will require the parties to be transparent on their situations. This may include sharing financial information beyond that which a party might ordinarily do. The parties should consider the follwoing.

  • Preparing the information – for example, a landlord might require its tenant to complete a detailed questionnaire to facilitate a review of the strength (or otherwise) of the tenant’s financial position and in turn to inform the landlord’s decision regarding rent payment plans. This will require tenants to think ahead and be ready to respond to such information requests. Equally, if a landlord declines to agree rent payment plans then the Code will require them to be transparent and to share their reasons for refusal.
  • Confidentiality – depending on the nature of the information being shared, certain parties may require a short-form non-disclosure agreement to be entered into to ensure the confidentiality of the information communicated.
  • Factual position - the Code also lists certain factual situations (see paragraph 21 of the Code) which may indicate the extent of the impact of Covid-19 on the tenant’s financial position. For example, the period of time a tenant’s business is closed, the effects of social distancing on the operation of the business and whether government support has been received and how it has been used.

2. How should the plan be documented?

There are a variety of formats for documenting the plans and this will largely depend on the specifics of the rent payment plan agreed between parties.

The Code recommends:

  • that any such plan should be documented in writing; and
  • if the tenant adheres to the plan then the landlord will not be able to forfeit the lease for non-payment of rent when the moratorium on forfeiture is lifted. We consider this to be the position in any case with such arrangements and any landlord who did try to forfeit would most likely fail as the tenant would have a strong case for relief from forfeiture.

If you would like advice on documenting a rent payment plan then please contact a member of the Commercial Real Estate team.

3. What if agreement cannot be reached?

In some cases parties may find that it is not possible to reach agreement between themselves. However, if the parties believe that a negotiated agreement may still be achievable the Code suggests they consider referring the matter to a third party mediator (if the costs of the mediation are likely to be proportionate).