A collaborative approach to commercial rent negotiation?

In March of this year we advised that the Government had issued an extension of the moratorium on lease forfeiture to those under commercial leases. To recap, this moratorium did not absolve the tenant of their obligation to pay rent but, rather, gave them the breathing space to negotiate affordable solutions to see them through a period of economic uncertainty.

Originally, this relief was to extend until the end of June 2020, just past the June quarter day but it was always considered that it may be extended to allow further protection to business tenants as they slowly began trading again. As predicted, the Government have now extended this protection until 30 September 2020 in conjunction with a Code of Practice for commercial property relationships during the COVID-19 pandemic (the Code), which provides a ‘best practice’ framework for landlords and tenants to reach new rental agreements that facilitate the best interests of both parties.

What does the Code say?

The Code encourages landlords and tenants to observe four key principles when negotiating.

• Transparency and collaboration: in particular, to act reasonably, swiftly and in good faith as economic partners rather than opponents.
• A unified approach: to help and support each other in dealings with other stakeholders, governments, utility companies and financial institutions.
• Government support: including a spectrum of costs such as supplies of goods and services, rent and other property costs, such as insurance, utilities and service charges.
• Acting reasonably and responsibly: in order to identify mutual solutions where they are most needed.

The Code remain in force until 24 June 2021 and, essentially, gives guidance as to the factors to which both landlords and tenants should have regard when negotiating temporary changes to any lease payment obligations in the coming months. The Code is clear that Tenants that can afford to pay in full should continue to do so, but those that have been worst affected are encouraged to negotiate with landlords to agree achievable payments and should be prepared to disclose to their landlords an appropriate amount of business and/or financial information to support their position. The Code further advises landlords of some key factors (albeit this is a non-exhaustive list) to take into consideration when receiving such requests, such as:

• the duration and extent of restricted trading
• the impact on certain types of business of social distancing
• the tenant’s previous track record under its lease terms.

In return, where landlords are not in a position to offer financial leeway, they too must be prepared to give reasonable explanations as to why, similarly providing evidence where appropriate.

Rather than seek to provide a ‘one-size-fits-all’ framework, the Code recognises that every landlord and tenant relationship is different but suggests that possible new arrangements could include:

• a full or partial rent-free period for a set number of months
• a deferral of the whole or part of the rent for one or more payment periods
• landlords agreeing to waive contractual default interest on unpaid rents.

The Code emphasises the importance of maintaining insurance cover for commercial properties ensuring that they continue to be safely maintained. Any service charge and insurance charge payable should not be profit-making and, unless otherwise agreed, needs to be paid in full. The Code advises that service charges should be reduced accordingly where lack of use has lowered service costs and that management fees should reflect the actual work carried out.

Is the Code enforceable?

The Code is voluntary and will not alter the legal position of, or lease contract between, the landlord and tenant, and/or or any guarantor however it is to be noted that adherence to new agreements entered into by the parties will operate to protect against forfeiture for non-payment of rent under the lease even after the Coronavirus Act 2020 moratorium on forfeiture has expired.

Further, we anticipate that parties’ behaviour will serve as a guide in determining whether parties have acted reasonably and responsibly (per the Code requirements) should disputes arise further down the line. The Code has been created in the spirit of collaboration and transparency and encourages a fresh, and some may say welcome, approach of commercial compassion.

For more detailed advice as to how these ongoing changes could affect your legal position and how to formalise any agreements reached under the Code, please contact Charlotte Wormstone or Francesca Reason of Birketts’ Property Litigation Team.