knowledge 5 October 2020 |

COVID-19: Code of Conduct for Commercial Tenancies Published

Effect of the Code

The Code is a voluntary one and does not override the lease and other legal commitments and considerations.  Fundamentally, the legal rights and obligations as between landlords and tenants remain governed by the terms of the lease agreed between them and subject to landlord and tenant legislation.  The Code serves, instead, to promote reasonable co-operation, communication and compromise and sets out practical ways in which landlords and tenants might engage to alleviate strain on tenant businesses and implement mutually beneficial solutions.  The Code is envisaged to be in place until 31 July 2021.

Overarching Principles

As a general principle the Code encourages both landlords and tenants to act “reasonably, swiftly, transparently and in good faith” to identify and implement mutually beneficial solutions that offset the impact of COVID-19.  The Code encourages landlords in particular to be open to the mutual benefits of compromise, rather than relying on strict legal rights, and promotes mediation as a means of reaching agreement or compromise on any issue that might otherwise lead to dispute.  It also encourages landlords who benefit from a loan deferral arrangement with a lender, to share that benefit proportionately with the tenant.

Negotiating Arrangements / Concessions

Tenants are encouraged to meet their contractual commitments to the landlord where they reasonably can.  When looking for concessions, they are encouraged to be open, honest and clear as to their needs and to provide sufficient and accurate financial and other information to enable the landlord to properly consider the request.

In response to a tenant request for concessions, landlords are encouraged to provide concessions where they can, and where they don’t, to provide a clear and reasonable explanation for the refusal.

In considering a tenant request, landlords are also encouraged to take into account the ways in which the tenant’s business has been impacted by COVID-19 including, among others, the closure period impacting the tenant’s business and its ability to trade via other means; the duration and extent of restricted trading due to social distancing; extra obligations and costs incurred through measures to protect employees and customers and to adhere to social distancing; and the tenant’s ability to absorb losses.

A range of options to structure concessions is also set out including, among others, a full or partial rent free period for a set number of payment periods; a deferral of the whole or part of the rent for one or more payment periods; the payment of rent over shorter periods; and/or extending the term of the lease to cover any periods of closure.  As part of any negotiation, the Code also envisages the possibility of the landlord seeking to negotiate a benefit in its favour in return for the tenant concession.

Service Charges and Insurance

Service charges and insurance payments are singled out for specific treatment in the Code on the basis that these are not profit-making charges and so should be paid in full by tenants.  
However, landlords are encouraged to pass on reductions due to lack of use or occupation (and by way of refund if possible, rather than credit, and so help with tenant cash flow) and to ensure that service costs reflect actual work done and best value for occupiers.

Conclusion

It is already the case that landlords can reach concessionary arrangements with tenants in financial difficulty, with many in place due to the impact of COVID-19.  The Code supports this practice further by providing some practical guidance for both parties.  It also acknowledges the reality that leases can sit within a complex web of legal arrangements.  Landlords don’t necessarily have complete control over what they might agree with tenants, being very often constrained by their own obligations to lenders, superior landlords, investors or others.  This complexity is just one of the reasons why this type of discussion between landlords and tenants needs to continue to be carefully considered on a case by case basis.  The Code makes a good case for communication and compromise but there can be no one-size-fits-all.

Also contributed to by Martina Firbank