Commercial Landlords Code of Practice – Commercial Rent Arrears

Code of Practice to Guide Commercial Landlord and Tenants During COVID-19 Crisis – Commercial Rent Arrears

The UK government has published a temporary Code of Practice with the aim of encouraging fair and transparent discussions between commercial landlords and tenants during the COVID-19 crisis concerning rental payments and arrears, and promoting a spirit of collaboration rather than opposition.

The Code of Practice for commercial property relationships during the COVID-19 pandemic, issued on 19 June 2020, follows consultations with British Chambers of Commerce, British Property Federation, British Retail Consortium, Commercial Real Estate Finance Council, Revo, Royal Institution of Chartered Surveyors and UKHospitality.

Rent payments and arrears

1. Tenants should continue to pay their rent or as much of it as they are able to pay, whilst landlords are encouraged to react sympathetically to tenant’s financial constraints where possible.  Tenants remain liable for their rent arrears unless a negotiated settlement is reached with their landlords. 

2. Tenants seeking rent concessions should be prepared to provide appropriate financial information in support of their request.

3. Landlords should grant concessions to affected businesses to the extent they can, having regard to their own financial commitments. Any refusal to grant a concession should be accompanied by a reasonable explanation.

4. Agreement of a formal written rent payment plan between lease parties is advised to “protect against forfeiture for non-payment of rent under the previous lease terms” beyond the expiry of the current forfeiture moratorium.

Insurance and service charge

1. Tenants should continue to pay insurance and service charges in full.

2. Service charges should be reduced where lack of use of the property has reduced the service costs and frequency of service charge payments spread over shorter periods.

3. Where extra services may be required and/or additional service costs incurred, for example, where necessary to comply with COVID-19 health and safety requirements, landlords should ensure that service costs are reduced to the extent reasonably possible.

4. Any known net reduction in overall service charge due to lack of use of a property (taking into account any additional COVID-19 related costs) should be passed on to tenants as soon as possible in advance of the annual service charge reconciliation to aid cash flow and business viability. Both parties should have regard to RICS guidance in relation to service charges and COVID-19 in their service charge discussions.

5. Management fees should reflect the actual work carried out in managing the services and the service charge during the COVID-19 crisis (rather than the usual percentage-based levy).

The Code has been issued on the back of the government’s existing package of temporary protective measures (with newly extended deadlines to cover the June quarter) for commercial tenants including:

1. the moratorium on forfeiture introduced by the Coronavirus Act 2020, which prevents any business from being forced out of its premises if it misses a payment until 30 September 2020;

2. The banning of the use of statutory demands (between 1 March 2020 and 30 September 2020) and winding up petitions presented from Monday 27 April 2020 until 30 September 2020, where a company cannot pay its bills due to coronavirus (to be introduced as part of the imminent Corporate Insolvency and Governance Bill); and

3. secondary legislation (in the form of The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020) preventing landlords using Commercial Rent Arrears Recovery between 26 March 2020 and 30 September 2020 unless they are owed 189 days’ unpaid rent.

Commercial landlords are still permitted to serve a section 146 notice on their tenant for a breach of the lease, however.

A section 146 notice is served by a landlord when they consider their tenant to be in breach of the terms of the lease agreement. Other than in relation to unpaid rent (where a section 146 notice isn’t required, but sometimes served), a section 146 notice is a necessary first step in the process of recovering possession of a property.

The notice must give the tenant a reasonable period of time to comply with its requirements.  Should the tenant fail to comply, the landlord can take steps to terminate the lease, resulting in the tenant being evicted from the let property.

Paul Wingfield of Global Enforcement Solutions is an Enforcement Agent who deals with evictions and recovery of debt. Mr Wingfield stated the following:

“Currently, due to the coronavirus pandemic, commercial landlords cannot instruct an Enforcement Agent to peacefully re-enter a property in order to forfeit a lease agreement in relation to rent arrears. This is a temporary measure.

Commercial landlords could usually instruct an Enforcement Agent to collect any outstanding rent providing it is more than 7 days in arrears. However, due to the temporary measures, commercial rent arrears recovery cannot be used unless the rent is more than 189 days in arrears.”