COVID-19 has forced the government to act rapidly, bringing in swingeing changes in a number of sectors. Many anticipated a new code of practice would be forthcoming for the commercial property sector, with the expectation that it would be mandatory.
What arrived on 19 June 2020 was indeed a new code of practice for commercial property, but contrary to what was anticipated, the government has chosen to make it voluntary. Therefore, while the new code may be beneficial to some discussions between landlord and tenant, it doesn’t provide the unequivocal basis that many hoped for.
Who Does It Apply To?
Any commercial lease which has been hit by COVID-19 will be affected by this new voluntary code. It is expected that hospitality, retail and leisure sectors will see the biggest impact.
The code will remain in force until 24 June 2021, but it’s worth mentioning once more, that it is purely voluntary so its effect is limited. Some organisations have said they will “encourage” their members to adopt the new code. These are:
- UK Hospitality
- Commercial Real Estate Finance Council Europe
- Royal Institution for Chartered Surveyors
- British Retail Consortium
- British Property Federation
- British Chambers of Commerce
What the Code Says
The code has four key principles:
- Transparency and collaboration – to act transparently, swiftly, reasonably and in good faith given the mutual interest in the continuity of business
- Government support – parties should acknowledge any assistance and relief they received from the government to help them meet their commitments, such as rent
- A unified approach – all parties should be supportive of each other when dealing with a third party. This may include banks, the government and utility companies
- Acting reasonably and responsibly – COVID-19 has affected many people. Parties should recognise this and attempt to come to a mutually acceptable solution at all times.
Insurance and Service Charges
The code recognises that insurance and service charges are inherently different to rent as they are not intended to deliver a profit. As such, these should always be paid in full unless parties come to an alternative agreement.
Despite this, the code encourages landlords to consider whether the service charge could be lowered in view of the reduced occupation due to COVID-19. Any reductions in costs that the landlord receives should be passed along to the tenant as quickly as possible.
The code lists some factors that landlords may wish to take into account when considering an application for flexibility or support. These include the tenant’s ability to trade, their track record and whether additional costs have been incurred to manage social distancing. Landlords are also encouraged to consider alternative arrangements such as:
- A period which is either partially or totally rent-free
- Payment being made over shorter periods, such as monthly rent rather than quarterly
- Lowering rent to the current market rate
- Waiving the right to charge interest on default
- Using the rent deposit to cover a shortfall without requiring the tenant to top it back up immediately
- When a property is unoccupied, splitting the rent between the tenant and the landlord
- Agreeing concessions
The government hopes that all parties will engage with the voluntary code of practice in the spirit with which it was intended, even though it is voluntary. The full code can be found here.