June Quarter Day: Meet the new Code. Same as the old code?

The Government has now published its proposed Code of Practice for commercial property relationships, codifying actions that many landlords and tenants were taking already as a result of lockdown and its impact on the March quarter day.   Of more immediate importance, the Government has also confirmed its intention to extend the current protections provided to commercial tenants. 

Restrictions on landlords’ remedies extended

As expected, the Government has signalled its intention to extend the restrictions on landlords’ remedies in relation to commercial property:

• The moratorium on forfeiture will be extended to 30 September 2020.
• The restrictions on commercial rent arrears recovery (CRAR) will be extended so that a landlord must be owed 189 days’ rent before exercising CRAR. This means that a landlord must wait until 30 September to exercise CRAR in relation to non-payment of rent on the March quarter day.
• The temporary ban on the use of statutory demands and winding up petitions where a company cannot pay its bills due to coronavirus will be extended to 30 September 2020. [1]

The statutory instruments necessary to enact the extensions will be published in the coming days and will be brought into force before the current extensions expire.

These new measures follow the recent extension to the stay of possession proceedings to 22 August 2020.

Code of Practice

The Government has also published its Code of Practice for commercial property relationships.[2] 

The Code is voluntary and it does not alter the underlying legal relationship between the parties, making it difficult to predict its impact that this early stage. Many of the proposals and ideas contained in it will be familiar to those who have been tackling the issues of rental payments since the March quarter day.

Some clear messages are apparent on an initial review of the Code:

• The Government’s objective is to provide the right support to all those in the chain of property payments. This is in response to the concern of many landlords that the current restrictions require landlords to shoulder the burden of non-payment notwithstanding their own commitments and obligations.
• Tenants who are able to pay their rent in full should do so. Tenants seeking concessions should be clear with landlords about why concessions are needed and be prepared to provide appropriate financial information about their business.
• Landlords should also provide support to tenants if they are able to do so (having regard to their own financial commitments and fiduciary duties). Landlords refusing concessions should be clear with their tenants about why they are doing so.
• It is expected that both sides will communicate with each other, transparently and in good faith.
• UK Finance has confirmed its members’ continued support for commercial landlord customers including amendments to facilities and capital payment holidays.[3]
• Government support measures can be used to pay rent and other lease costs.
• Service charge and insurance costs should be treated separately to annual rent. The Code makes the point that it is important that buildings are insured and safely maintained. The service charge should take into account any changes caused by the pandemic, such as increased cleaning costs or, equally, certain reduced costs as a consequence of lower occupancy during lockdown or during a phased return to the workplace.
• In the event that a landlord and tenant are unable to reach an agreement on concessions, they should consider employing a mediator to assist with negotiations.
• Agreeing to and adhering to a new arrangement under the Code should protect against forfeiture once the current moratorium is lifted.

The Code provides a list of concessions and options available to help alleviate rental payment pressures. None are novel and some, such as lease extensions, would benefit from further governmental support (SDLT payment and reporting reliefs, for example) to make them more attractive. Other measures, such as turnover rents, will likely require sharing of a lot more financial data between parties that has historically been the case.

One question that is likely to be asked of both landlords and tenants is whether they are supporting the Code, in the same manner as the industry asks if other codes are being supported such as the Lease Code. 

Another issue is whether the Code can be effective while it remains voluntary. It may prove necessary for the Government to intervene further, whether by making the Code mandatory or by introducing further measures. It is also not clear how the courts may view the Code or its lack of use when a claim comes before it. 

The Code is described in its foreword as a starting point on the road to economic recovery. It also represents the first step towards transitioning away from the current restrictions on landlords’ remedies. Time will tell whether the Code becomes the main replacement to the current restrictions, or whether it is one of several measures to be introduced in the coming months.

Further advice

If you need further advice on this topic, please get in touch with your normal Real Estate contact at Mills & Reeve LLP or please contact Dominic Hordern or Christopher Bartley.

Visit the Mills & Reeve Coronavirus hub here.

[1] https://www.gov.uk/government/news/government-provides-further-halt-to-business-evictions-and-more-support-for-high-street-firms

[2]  https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector

[3] https://www.ukfinance.org.uk/press/press-releases/lenders-confirm-support-for-commercial-landlords