UK Commercial Property Code Promotes Collaborative Landlord-Tenant Relationships During COVID-19

June 22, 2020

On 19 June 2020, the UK Government published a Code of Practice for commercial property relationships during the COVID-19 pandemic. The Code of Practice, prepared in collaboration with leading business groups, is the latest Government response to the impact of COVID-19 on landlords and tenants in the commercial property sector. Although voluntary, the Code of Practice will apply until 24 June 2021 and is intended to promote good practice and “to support businesses to come together to negotiate affordable rental agreements.

A number of organisations (which include the British Property Federation and the Royal Institution for Chartered Surveyors) have endorsed the Code of Practice and will encourage their members to adhere to its principles.

Code Principles

In summary, the Code of Practice sets out the following principles:

  1. In all dealings with each other, landlords and tenants should act collaboratively, with transparency and in good faith.
  2. A unified approach is encouraged between stakeholders to help manage the consequences of COVID-19.
  3. Where businesses have sought government support during the pandemic, it should be recognised that this support is provided to help businesses meet their financial commitments, including lease rents and associated costs.
  4. Landlords and tenants should act reasonably and responsibly to identify mutual solutions.

In spite of seeking to adhere to the Code of Practice, some parties will be unable to reach a specific agreement, in which case (and if the cost is proportionate) third-party mediation is encouraged to facilitate negotiations.

Rent Concessions Discussions

Throughout the Code of Practice is an emphasis on flexibility. Individual circumstances will ultimately dictate the outcome, but in any event, both parties should be willing to consider renegotiating rent where possible to ensure the continuation of viable businesses. In this vein, the Code of Practice sets out numerous arrangements which may be agreed by both parties; for example, a rent concession may take the form of a rent-free period, a rent deferral, a rent reduction, or the parties may agree to a shorter rent payment period (e.g., monthly instead of quarterly).

Whatever the outcome, the Code of Practice encourages tenants seeking concessions to be clear about why they are needed and to provide landlords with adequate financial information to substantiate a request. Likewise, landlords should provide concessions where they reasonably can, with regard to their own fiduciary duties and financial concessions. If a concession is unfeasible, then landlords should be clear with tenants about why they are refusing the concession.

Noticeably, in the event the parties agree to a rental concession, the Code of Practice encourages the parties to protect the new arrangements against forfeiture for non-payment of rent after the Coronavirus Act 2020 moratorium on forfeiture is lifted (which may occur 30 September 2020, at the earliest) and for so long as the rent payment plan applies.

Service and Insurance Charge Considerations

Additional guidance is provided in relation to the landlord’s recovery of service charge expenses and insurance premiums, which should be paid in full unless otherwise agreed between the parties. To protect vulnerable tenants, service charge should be reduced where the lack of use of a property has lowered the service charge costs incurred and this reduction should be passed onto tenants as soon as possible. Landlords should also consider whether the frequency of tenant service charge payments should be spread out over shorter payment periods. This is particularly important in circumstances where there is an increase in service charge costs to enable a building to operate in compliance with health and safety requirements in the context of COVID-19.

McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.