Government Publishes New Code of Practice for commercial property relationships during the COVID-19 pandemic. BLM responds

Government Publishes New Code of Practice for commercial property relationships during the COVID-19 pandemic. BLM responds

The government published a voluntary code of practice [19 June] "designed to provide clarity for businesses when discussing rental payments and to encourage best practice so that every part of the chain is supported”. The Code has been developed in close collaboration with retail sector industry bodies and although voluntary is intended to represent best practice. 

The code of practice for the commercial property sector sets out four key principles:

  • Transparency and collaboration: the parties should act reasonably, swiftly, transparently and in good faith as economic partners, not opponents.
  • A unified approach: help and support each other in all dealings with other stakeholders to achieve outcomes reflecting The Code’s objectives
  • Government support: recognise that government support has been provided to help businesses meet their commitments which includes the payment of rent.
  • Acting reasonably and responsibly: to operate reasonably and responsibly, recognising the impact of COVID-19, in order to identify mutual solutions where they are most needed.

The Code also sets out proposals for the new arrangements

  • Financial Transparency – Both parties should be clear about why concessions are necessary and what cannot be agreed, providing financial information about their businesses.
  • Considerations - landlords should bear in mind the impact of issues such as the closure period’s impact; restricted trading due to social distancing; extra cost of complying with requirements; needs of other stakeholders (such as employees and banks); government support received; previous track record; any concessions already agreed; and the impact that providing support may have on competitors and on other support.
  • Forfeiture – The new arrangement should protect against forfeiture after the moratorium on forfeiture is lifted and for so long as the rent payment plan applies.
  • Options – It suggests various options for the new arrangements:
    1. Rent concession - Rent-free period, rent deferral, monthly rents or payment in arrears, or split the cost of the rent for the unoccupied period between them.
    2. Rent Deposits - landlords drawing from rent deposits on the understanding that the deposits will not be “topped up” before it is realistic and reasonable to do so.
    3. Portfolio Approach - reductions in rent across other units occupied by the tenant and owned by the landlord, as part of a negotiated agreement applying to a portfolio of units.
    4. Interest – waiver of interest on unpaid rents.
    5. Expiry Date – the concessions should end on a fixed date, or on reaching the trigger point of particular circumstances.
    6. Variations - 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.
    7. Re-gear - 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.

Service and insurance charges

The Code considers that as any service charge and insurance charge payable under the lease is not profit-making, it needs to be paid in full but to assist tenants:

  1. These should be reduced where the lack of use of a property has lowered the costs incurred (although conversely, it is acknowledged that in some cases there may be additional service costs required) and this reduction passed on to tenants as soon as possible to assist cash flow.
  2. Landlords should ensure that service charge costs are reduced where practicable and consistent with providing best value for occupiers.
  3. Where possible, the frequency of tenant service charge payments should be spread over shorter periods e.g. monthly.
  4. 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.
  5. Any solution the parties reach in relation to service charge should take account of the RICS Codes of Practice.

Conclusion

These options proposed are not new but do indicate that the government expects the industry to come to their own arrangements and that the government support currently being offered, such as the forfeiture moratorium until September, is only a temporary measure. As the next rent quarter day approaches this forthcoming Wednesday 24 June, it remains to be seen whether a voluntary code of practice will be sufficient to ensure the substantial changes required to avoid the widespread use of the insolvency regime to re-gear existing lease commitments.

 

 

Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to customers of BLM. Specialist legal advice should always be sought in any particular case.

 

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