The Code of Practice for commercial property relationships during the COVID-19 pandemic (the Code), which was launched by the government in June 2020 to improve collaboration between commercial landlords and tenants over rental and service charge arrears, has been updated.
The Code encourages parties to work together in an open and transparent way towards reaching a compromise on lease liabilities. But, whilst backed by many industry leaders, it remains voluntary and is often criticised for lacking any serious bite.
In an attempt to shake things up, the government promised to revisit the Code in the New Year and on 6 April launched an Annex to the Code, including a template for parties to use to negotiate rent and service charge arrears. The template can be accessed here, but the key aspects include:
- Tenants are to disclose financial information, such as turnover and rent payment history, to help to illustrate the true impact of the pandemic on their businesses and, therefore, help landlords to make a fair and reasonable assessment of the tenants’ financial positions.
- Landlords are asked not to use the disclosure process to try and uncover unrelated historic or personal financial information and they shouldn’t demand guarantors where none previously existed under the lease.
- Tenants are encouraged to make offers to settle on what they can reasonably afford. They should also propose a payment plan, which could, for example, be based on anticipated future turnover.
- Landlords are encouraged to respond to the tenants’ offers, reflecting on their own financial situations. If the offers are rejected, landlords are asked to explain why and propose counter-offers.
Whilst this might be seen as a positive step, it would be optimistic to think the new template offers the Code more teeth. The Code still remains voluntary and doesn’t change the underlying legal relationship or lease contracts between landlords, tenants and guarantors.
The courts are supporting this view too. This month saw the first COVID-19 rent arrears test-case reach the High Court (see further details here) in which the court considered, amongst other COVID-19 related defences, the parties’ pre-action conduct. Whilst on the facts it was the tenant that was found guilty of not having engaged properly with the Code, the court confirmed, as expected, that the Code did not affect the tenant’s ultimate liability to pay.
In a second High Court case last week (see further details here), again the court gave short shrift to a defence relying on the Code. In handing down judgment, Master Dagnall said that the Code had no role to play in the litigation process and wasn’t applicable where tenants were shown to be able to pay. It is also interesting to note that these decisions were at summary judgment level where the courts were very quick to conclude that a defence based on the Code did not have any reasonable prospect of success at trial.
But this shouldn’t be seen as licence to ignore the Code entirely. Proactive landlords and tenants who take the opportunity to open up and negotiate in the spirit of the Code will stand to benefit from the prospect of resolving potentially costly disputes before reaching court and the further uncertainty this brings to their businesses. Also, the updated Code now expects parties to have exchanged sufficient information to understand each other’s position, so engaging with it and making a concerted effort to settle the issues should at the very least offer parties some costs protection if it does end up in court.
Also, with estimates of rent arrears reaching £7bn, the government is under pressure to find ways to force parties to engage. On 6 April the government announced a “call for evidence” consultation (see further details here) to understand how commercial landlords and tenants are dealing with the rent crisis. The consultation is due to end on 4 May and will supposedly inform what future policy measures might be taken. This could include the phased withdrawal of existing restrictions (such as on the right to forfeit for non-payment of rent) and possible further legislative options, including requiring parties to engage in adjudication to settle arrears. Whilst it would be surprising if the government goes as far as introducing measures that directly interfere with contractual obligations, it would be equally surprising if the Code, which remains in force until 24 June 2021, has seen its last iteration.
In the meantime, if parties are engaging with the Code and the new template, parties are encouraged by the Code to ensure that they document any agreements and do so with the benefit of legal advice.
Markus Klempa