22 June 2020

Covid-19 and commercial property rent recovery: new code of practice and restrictions on remedies to be extended

On 19 June 2020, the Government published the Code of Practice for commercial property relationships during the COVID-19 pandemic ("the Code"). The Code was drafted by a Working Party comprising landlord and tenant representative bodies.

The Code is voluntary and seeks to provide a framework by which landlords and tenants can come to some arrangement about rents, service charges and insurance contributions that tenants cannot currently pay due to the impact of Covid-19 on their businesses. It will apply until 24 June 2021.

Where tenants can pay their rents, the Code states that they should do so. Where tenants are not able to pay their rents, tenants and landlords are encouraged to engage with each other in an open and constructive manner to achieve a mutually acceptable solution. The Code contains a lengthy list of possible solutions ranging from rent deferment to rent concessions and beyond.

The publication of the Code was accompanied by a Government announcement that legislation will be passed to extend/increase the current restrictions on certain remedies used by commercial landlords to collect rents. The Code makes clear that tenants should pay service charges and insurance as these are costs landlords have had to incur.

While some landlords and tenants may disregard the Code given its voluntary nature, they will then increase the risk of it being made mandatory or, in the case of tenants, the risk that the legislation to restrict landlords' enforcement rights will be lifted.

Key aspects of the Code

  • Transparency and Collaboration: parties are to act reasonably, swiftly, transparently and in good faith in their dealings with each other. For example, tenants seeking concessions should provide detailed financial trading information to support their requests.
  • Unified approach: all stakeholders in relation to the relevant property will act together to help manage the economic and social consequences of Covid-19. This includes government bodies, utility companies and financial institutions.
  • Government Support: where tenants have received funds and savings from government support schemes, these should be used to pay rents as well as the tenant's other financial liabilities.
  • Acting Reasonably and Responsibly: parties will operate reasonably and responsibly to seek out mutual solutions.
  • Mediation: parties should be prepared to mediate where proportionate at their own cost if they cannot otherwise reach agreement.
  • Service charges and Insurance: tenants should pay these in full but landlords should do their best to minimise service charges.

Extensions to restrictions on landlords' remedies

  • The moratorium on forfeiture for non-payment of rent is extended until 30 September 2020.
  • The restrictions on using statutory demands and winding-up proceedings where companies cannot pay their bills due to Covid-19 are to be extended until 30 September 2020.
  • From 24 June 2020, landlords cannot use CRAR unless 189 days' of rent is in arrears i.e. over 2 quarters rent. The amount of arrears had previously been increased from 7 to 90 days' rent. Although the Government announcement stated this will apply to 30 September 2020, the draft legislation states it will last only until 23 August 2020.

A landlord's right to pursue a debt claim through the courts for unpaid rents is unaffected by any restrictions that have been introduced and may well be a desirable option where a tenant that can pay refuses to do so. Judgment interest is 8% per annum and there is unlikely to be a defence to liability, so landlords should be well placed to recover their costs and interest in addition to the debt. Any Judgment can then be enforced by execution on the tenant's goods.

Disclaimer

The current global crisis is evolving rapidly, and the rules and guidance for individuals, companies and other entities to manage its implications are similarly fast moving. Notes such as this may be out of date almost as soon as they are published. If you have any questions prompted by this article or on any other matter relevant to you, please get in touch with your usual contact at Forsters.

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