Voluntary Code to Help Commercial L&Ts
Thousands of businesses are fighting for survival, but though government has provided plenty of financial support, it cannot last indefinitely.
Businesses who are renting commercial premises may be considering whether they can afford to continue paying for that space; and commercial landlords will be concerned at the potential loss of revenue and an increase in premises lying vacant.
The government’s code of practice for the commercial property sector, published in June in response to the challenges posed by covid-19, is intended to encourage commercial landlords and tenants to work together to protect businesses which are still viable.
The code is endorsed by leading bodies who formed the code’s steering group including the British Chambers of Commerce, British Property Federation, British Retail Consortium and the Royal Institution for Surveyors. It has also been endorsed by many other organisations.
It is voluntary with a focus on best practice and transparency between the parties as they deal with what it describes as “income shocks”. It is wide-ranging in its target audience – applicable in relation to all UK commercial leases held by businesses in any sector and which have been impacted by covid-19.
Under the general measures announced by the Chancellor, for instance, the temporary moratorium on the exercise of forfeiture rights by landlords and the restriction on landlords’ use of commercial Rent Arrears Recovery (CRAR). The overall effect is a delay not a complete halt on such action.
Principles
The code is underpinned by a number of principles, notably transparency and collaboration; a unified approach; the existence of government support; and acting reasonably and responsibly.
Both parties are urged to be transparent and act reasonably and responsibly, while recognising the pandemic’s impact on their finances. Each relationship will need to respond to these circumstances differently.
Under the code, commercial tenants are encouraged to pay their rent in full if they can - reflecting the legal position that tenants remain liable for covenants and payment obligations under the lease, subject to those terms being renegotiated by mutual agreement.
Tenants who are unable to pay are encouraged to pay what they can and to reach an agreement with their landlords, though the reality is that this may not always be possible. In those circumstances, the principles set out in the code suggest employing a third-party mediator by mutual agreement between the parties to help facilitate negotiations.
Landlords are encouraged by the code to support businesses if they are in a position to do so. But what does this mean in practice? It could, for example, mean negotiating affordable rental agreements and engaging with lenders and other finance providers to arrange flexibility in their existing financial arrangements.
Landlords are also encouraged under the code to show willingness to consider a tenant’s “reasonable case” put forward by a tenant in distress and whether they can offer some temporary arrangement that could enable the tenant’s survival.
What businesses and their advisers may find particularly useful within this code are two lists: firstly, one setting out specific issues the parties may want to consider; and secondly, a list of potential new arrangements that could be agreed to by both parties.
When the code was published, Minister for Regional Growth and Local Government Simon Clarke MP said “our transition back to normality will take time” and the code represents “a good starting point on our road to economic recovery”.
It certainly appears to strike an excellent balance between the needs and expectations of both parties - but specialist advice should always be taken.
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