New government Code of Practice for commercial property relationships

The government has published a new Code of Practice to assist landlords and tenants as they deal with income shocks caused by the pandemic.

On 19 June 2020, the government published a new Code of Practice for commercial property relationships during the COVID-19 pandemic. It is a voluntary Code, and the government has confirmed that it does not change the underlying legal relationship or lease contracts between landlord and tenant and any guarantor. However, the Code is intended to reinforce and promote good practice amongst landlord and tenant relationships during the pandemic. It applies to all commercial leases held by businesses that have been seriously negatively impacted by the COVID-19 crisis, and it will be applicable until 24 June 2021.

The Code sets out a number of principles that should be taken into account by landlords and tenants, including:

– Transparency and collaboration – Landlords and tenants are economic partners and so in all dealings with each other, in relation to the Code and the COVID-19 crisis, they will act reasonably, swiftly, transparently and in good faith.

– Unified approach – Landlords and tenants will help and support each other in their dealings with other stakeholders (such as banks), to achieve outcomes reflecting the Code’s objectives and to help manage the economic and social consequences of COVID-19.

– Government support – All parties recognise that Government support has been provided to help businesses meet their commitments, including rent payments.

– Acting reasonably and responsibly – Landlords and tenants will engage reasonably and responsibly, recognising the impact of COVID-19, to identify mutual solutions.

The government has emphasised that tenants should still make their rental payments if they are able to do so. However, tenants who are unable to pay in full should seek agreement with their landlord to pay what they can in accordance with the Code. The Code states that tenants seeking concessions should be clear with their landlords about why this is needed. This could include explaining their request by providing financial information about their business.

Under the Code, landlords should provide concessions where they reasonably can, and the Code sets out a list of issues to be considered by the landlord (such as any closure of the tenant’s business, the impact of government support and the needs of other stakeholders). The Code recognises that a landlord’s own commitments and duties should be taken into account when making the decision, and if the landlord cannot agree to a concession, the landlord should provide the tenant with reasons for this.

The Code also makes suggestions about possible arrangements between landlords and tenants. For example, rent-free periods, rent deferrals, waiving of interest, and any of these in return for other arrangements such as the removal of a tenant break right, or a new reversionary lease.

The Code also deals with service charge payable by a tenant, and states, for example, that where there is a known net reduction in overall service charge due to lack of use of a property, 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.

The full Code of Practice can be seen here. 

Many of our landlord and tenant clients are already working together to agree rent payment terms that are practical for both parties, and we would recommend that any such rent holidays, concessions or other terms are formally documented. For more information, please see our article about the importance of documenting a rent concession.

If you require further guidance regarding the effect of the coronavirus on commercial lease terms or advice on commercial leases in general, please contact Rosie Edwards, Solicitor, or Daniel York  Partner, in our Real Estate department or email your query to realestate@herrington-carmichael.com; call us on 01276 686222 or visit our website https://www.herrington-carmichael.com/contact/

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.