The government has recently put in place legislation to prevent commercial tenants from being evicted from their property or subjected to a winding-up petition as a result of the effects of the coronavirus.
Further to our previous blogs on the moratorium on forfeiture and the extension of the original moratorium, the government has put in place legislation to prevent commercial tenants from being evicted from their property or subjected to a winding-up petition as a result of the effects of the coronavirus.
However, the rent arrears have not been wiped away and in many cases will simply be accruing. This has left many landlord and tenants trying to come to a deal going forward that is acceptable to both parties.
With that in mind, the government has published a Code of Practice for commercial property relationships during the COVID-19 pandemic (“the Code”).
The Code itself is voluntary, applies until June 2021 and neither landlords nor tenants are bound by it. The purpose of the Code is to help those tenants who have been affected by coronavirus start a conversation with their landlords and to give landlords a clear indicator that they should be listening to their tenant and working with them where possible.
The Code sets out general principles that the parties should follow:
Transparency and collaboration
The Code makes clear that landlords and tenants are expected to work together, to share information, including financial details and to take into account other factors such as the tenant’s previous track record for paying rent and whether they have been able to access government assistance. The Code clearly states that the Bounce Back Loan Scheme available to tenants can be used to pay rent.
A unified approach
Landlord and tenants should endeavour to help and support each other to manage the consequences of COVID-19.
The Code makes it clear that the grants and relief available for businesses can be used towards rental payments as a part of the cost of a business.
Acting reasonably and responsibly
The Code being voluntary allows tenants and landlords to determine what, under the Code, works best for their landlord/tenant relationship, as well as with their cash flow and business models.
Arrangements of payment
More practically, the Code also sets out several possible arrangements that landlord and tenants can reach in respect of rent arrears:
a. A full or partial rent-free period.
b. A deferral of the whole or part of the one or more rental payments.
Both arrangements above should be considered if the tenant is in a position where paying the rent may be detrimental to them continuing as an entity to preserve the tenancy agreement, however, landlords may only be able to consider this if they have other income streams to rely upon.
c. The payment of the rents over shorter payment periods for a set time (e.g. monthly rather than quarterly).
This may be particularly useful for tenants and landlords to use these more frequent payments to shore up their financial stability for a month on month basis whilst many businesses have uncertain cash flows where quarterly lump sums may be detrimental to them.
d. Rental variations to reduce ongoing payments for example turnover rents or market rent where the current rent is above market rates.
Dependant on the discussions between landlords and tenants this could be a permanent change until the end of the rental term, or this could be arranged to a specific date and extended as needed and agreed by both parties.
e. Landlords drawing from rent deposits and for them to only be “topped up” when the tenant is able to do so.
For certain tenants where they would prefer to avoid rental arrears but cannot afford to meet the rental payments, this may be a beneficial solution based upon rental “overpayments” or lump sums to replenish the amount drawn down. Unlike other options provided within the code, this is the most finite in its usefulness as it is unlikely that this would be an option over a number of months/quarters as most rent deposits will only be for a few months of rent.
f. Landlords waiving interest due on overdue amounts.
Considering the guidance in the Code, it is advisable that this only be considered where tenants are ordinarily good paying tenants and these overdue amounts were as a result of COVID-19 restrictions implemented by government guidance.
g. 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.
This is not intended to be an exhaustive list but suggestions for ways forward.
Service charge and insurance
The Code also seeks to address the issue of service charges and insurance payments. Whilst service charge and insurance remain payable under leases, the Code states these should be reduced accordingly where the lack of use of a property has lowered the costs incurred. A good service charge clause should allow for this in any event.
The Code also suggests that service charge payments should be spread out and any savings be passed onto tenants ahead of the usual provision that any savings apply to the next service charge year.
In relation to insurance the Code does not provide any specific guidance, however if in following the general government guidance relating to COVID-19 there are any material changes that insurers should be notified of, it would be advisable to update them as soon as practicable.
If you are a commercial landlord or tenant who would like to discuss the points raised in this blog, please contact our Property Litigation Team. It is particularly important that any arrangements between landlord and tenants are properly documented to ensure the parties are protected and the agreement has the intended effect.
Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.