A Code of Practice has now been published to reinforce the importance of both landlords (Ls) and tenants (Ts), taking a collaborative approach to limit the damage resulting from the pandemic. At the moment it is merely voluntary and published as guidance only, however the guidance supplies details of best practices and should serve as a helpful basis for negotiating. Alex Messham of Hewitsons explains.
New Code of Practice for landlords and tenants
The code has been endorsed by several organisations including the British Property Federation, RICS and British Chambers of Commerce.
The underlying principles are:
- Transparency and collaboration: it makes the point that Ls and Ts are economic partners, not opponents. Therefore, in all dealings with each other, in relation to this code and the COVID-19 crisis, it encourages both to act reasonably, swiftly, transparently and in good faith.
- A unified approach: it encourages Ls and Ts to endeavour to help and support each other in their dealings.
- Government support: it encourages Ls to recognise that the government support has been provided to help businesses meet their commitments and will include a spectrum of costs from supplies of goods and services as well as rent and other property costs such as insurance, utilities and service charges.
- Acting reasonably and responsibly: it promotes the need for both to operate reasonably and responsibly in order to identify mutual solutions where they are most needed.
- Mediation: it encourages Ls and Ts to recognise there will be cases where both parties will have followed the code's principles but have been unable to reach a specific agreement and encourages the use of a third party mediator employed by mutual agreement to help facilitate negotiations. Albeit it recognises there will be cost implications for this.
- Clarity: Ts seeking concessions should be clear with their Ls about why this is needed. This means being prepared to be transparent and explaining their request by providing financial information about their business. Ls should provide concessions where they reasonably can and Ls seeking to refuse concessions should be clear with their Ts about why they are doing so.
- Considerations: In considering a T’s request to renegotiate their rent, Ls may wish to bear in mind the impact of the following issues on the entire business of both parties:
- a. Closure period impacting the T’s business, and ability to trade via other means
- b. Duration and extent of restricted trading due to social distancing requirements
- c. Extra costs and obligations through protecting customers to adhere to social distancing requirements
- d. Needs of other stakeholders such as banks, employees, suppliers during this period
- e. Government support received and how this has been used
- f. The T’s previous track record under its lease terms and any concessions to the T already agreed
- g. The impact that providing support may have on the T’s competitors and on other support already offered to Ts
- h. Possible alternative considerations in a regulated sector. For example, pubs that are regulated under the Pubs Code
- Forfeiture: Agreeing and adhering to a new arrangement agreed to by both parties should protect against forfeiture for non-payment of rent and any of the other protection provided by the Government.
- The code goes on to set out options of new arrangements that could be agreed to by both parties, see below:
- a. a full or partial rent-free period for a set number of payment periods
- b. a deferral of the whole or part of the rent for one or more payment periods
- c. 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
- d. 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
- e. Ls drawing from rent deposits on the understanding that the L will not then require that the deposits be “topped up” by the T before it is realistic and reasonable to do so
- f. reductions in rent, either in whole or part, across other units occupied by the T and owned by the L, as part of a negotiated agreement applying to a portfolio of units
- g. Ls waiving contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable
- h. provisions for ending the solutions on a fixed date, or on reaching the trigger point of particular circumstances
- i. Ts and Ls agreeing to split the cost of the rent for the unoccupied period between them
- j. 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 T, or an extension of the lease
- Insurance: It is important that buildings continue to be insured and safely-maintained so that they are ready to support the economy’s recovery after the COVID-19 crisis, as any service charge and insurance charge payable under the lease is not profit-making, and, unless otherwise agreed, needs to be paid in full.
The code provides guidance recognising the impact this may have on Ts’ finances, in relation to service charges and suggests considerations for varying service charges:
- a. these should be reduced accordingly where the lack of use of a property has lowered the service charge costs incurred
- b. conversely, 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
- c. Ls should ensure that service charge costs are reduced where practicable and consistent with providing best value for occupiers
- d. where possible, the frequency of T service charge payments should be spread over shorter periods
- e. 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 Ts as soon as possible ahead of the end of year reconciliation in order to help with cash flow and business viability
- f. Ls 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
- g. 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 full code of practice can be found here.
The code is welcome guidance in a time when collaboration is key. However, it is doubtful that it will provide tenants the comfort they need unless it becomes mandatory.
If you require assistance on negotiating rent concession agreements whether you are a Landlord or Tenant please contact Alex Messham by clicking here.
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