Restrictions on landlords' enforcement options to be extended as government introduces Covid-19 code of practice
Published on 22nd Jun 2020
On 19 June 2020, the government announced its intention to extend restrictions on forfeiture, Commercial Rent Arrears Recovery and the use of statutory demands, while also introducing a code of practice for commercial tenants and landlords.
Extension of restrictions
The following restrictions will now remain in place until at least 30 September 2020:
- A restriction on the landlord's ability to forfeit in respect of non-payment of rent.
- A requirement that a tenant must owe an amount of unpaid principle rent equating to 189 days (up from 90 days) before landlords are able to exercise the Commercial Rent Arrears Recovery procedure. As a result, landlords will, similarly, only be able to pursue sub-tenants pursuant to s.81 of the Tribunals, Courts and Enforcement Act 2007 where the defaulting tenant owes 189 days' worth of principal rent..
It has also been accounced that an amendment to the draft Corporate Insolvency & Governance Bill has been tabled to extend the period during which creditors are prohibited from issuing winding-up petitions based on statutory demands. The period may be extended from 30 June as originally drafted to cover demands served up to and including 30 September 2020.
Landlords hoping for some assistance from the Code of Practice will be disappointed when they scratch the surface.
Code of Practice
The Code of Practice for Commercial Property aims to encourage fair and transparent discussions between commercial landlords and tenants facing financial difficulties during the COVID-19 pandemic, by setting out principles of behaviour and good practice that should be followed. The government wants to balance the business risks of the COVID-19 pandemic as "reasonably and responsibly" as possible. The Code will be supported by its signatories until 24 June 2021.
The Code is the latest in a list of measures taken by the government, including certain provisions of the Corporate Insolvency and Governance Bill which, once enacted, will introduce further restrictions on arrears recovery methods available to landlords.
Who does the Code apply to?
The Code is intended to apply to all commercial tenancies where the tenant has been seriously impacted by the COVID-19 crisis, with a particular focus on the hospitality, leisure and retail industries.
Despite initial suggestions that the Code would apply to lenders, the final version of the Code does not cover lenders. Instead, landlords and tenants are encouraged to engage with their lenders and finance providers to seek flexible support. UK Finance and the Prudential Regulation Authority have issued guidance for tenants.
Landlords are having to cope with a substantial number of tenants seeking to renegotiate payment terms, irrespective of the severity of the impact that the COVID-19 pandemic may have had in terms of liquidity. The Code makes it clear that tenants who are in a position to pay their rent in full should do so. Tenants who are unable to pay in full (taking into account alternative financial resources that may be available to them) should pay what they can.
In turn, landlords who can provide support to businesses that need it should do so (taking into account their own financial commitments and fiduciary duties), so that viable businesses affected by the current circumstances are able to continue. Tenants seeking financial support from landlords must be prepared to provide an appropriate and relevant amount of financial information to demonstrate their requirements.
The Code provides a (non-exhaustive) list of arrangements that could be concluded between the parties, including rent deferral, rent-free periods, shorter payment periods, rental variations, drawing down from rent deposits (provided top up payments are only required when reasonable and realistic), reductions in rent and waivers on default interest. In return, in appropriate circumstances, tenants may be asked to give up or push back a break option, or to extend the lease term by entering into a reversionary lease.
Principles of the Code
The Code sets out principles of behaviour and responses to facilitate negotiations between commercial tenants and landlords in respect of any COVID-19 related arrangements.
- Transparency and collaboration: landlords and tenants should be economic partners and should act reasonably, swiftly, transparently and in good faith.
- A unified approach: landlords and tenants should support each other in dealings with third parties including governments, utility companies, banks and financial institutions.
- Government support: where businesses have received government COVID-19 related financial support, this support is to be used to meet businesses' financial commitments, which include rent, service charges, insurance and utilities.
- Acting reasonably and responsibly: landlord and tenants should act reasonably and responsibly in order to identify mutually acceptable solutions where they are most needed.
Landlords are also being asked to confirm that adherence to a rent payment plan negotiated in accordance with the Code will protect against forfeiture for non-payment of rent after the moratorium on forfeiture under the Coronavirus Act is lifted.
Irrespective of the arrangements that the parties may come to in respect of rent, where possible, service charge and insurance should be paid in full. The Code acknowledges that additional service costs may be required for some buildings to comply with health and safety requirements in the context of COVID-19. That said, Landlords are also encouraged to consider lowering service charge costs where the lack of use of a property leads to lower charges incurred, or agreeing to re-structure the frequency of service charge payments.
Ultimately though, as the Code is not binding and its contravention is unlikely to lead to any adverse consequences, many commentators remain sceptical as to how effective it will prove for either landlords or tenants.
In many ways, the Code simply puts into writing what many reasonable landlords and tenants have already been doing in order to mitigate the impact of the COVID-19 pandemic. If there is any immediate benefit for landlords arising from the Code, it may be that it discourages a small minority of tenants from attempting to use the pandemic as an opportunity to renegotiate payment terms despite being in a positon to pay their rent in full. This in turn will preserve landlords' time and funds to address the requests from tenants who genuinely require the most assistance.
This article was written by Donal Kelly, Senior Associate, and Hariett Parratt, Trainee Solicitor, at Osborne Clarke LLP.