Can A Voluntary Code Redress The Existing Imbalances?
Following a release of its draft earlier last week, on Friday (19 June) the Government published the “Code of Practice for commercial property relationships during the COVID-19 pandemic.”
At the same time the Government announced that it will extend the following existing measures from 30 June to 30 September
• suspend forfeiture/evictions
• prevent landlords using Commercial Rent Arrears Recovery unless they are owed 189 days of unpaid rent.
• amend the Corporate Insolvency and Governance Bill to extend the temporary ban on the use of statutory demands and winding-up petitions where a company cannot pay its bills due to coronavirus
The Code begins with a lengthy ministerial forward from Simon Clarke MP, Minister for Regional Growth and Local Government, followed by an introduction which explains the basis behind the Code. It also lists the various signatories and interest groups. It will no doubt be hoped that all businesses within those interest groups adhere to the Code, though there are some notable absences and individual landlords and tenants are not listed.
The operative part of the Code starts at paragraph 14.
The aims of the Code are clear and largely undisputable - landlords and tenants are economic partners and in all dealings with each other should act reasonably, transparently, swiftly, collaboratively and in good faith and there should be a unified approach.
The Code expects tenants and landlords to give reasons and (where appropriate) financial information to explain why a concession is sought or refused, respectively. This may prove to be helpful for landlords who are faced with a non-paying and unresponsive tenant, though the tenant can ignore the request without fear of any real sanction.
The Code also contains a non-exhaustive list of the ways the pandemic may impact on a tenant’s business in particular. The Code does not contain the same detailed list of considerations a tenant should bear in mind as to the financial impact that their refusal to pay rent can have on their landlord.
The Code also goes on to give some guidance on the kinds of solutions landlords and tenants might consider, such as rent-free periods, deferrals, reversionary leases or waiver of interest on late payments. It is likely that most landlords will have already considered these options, but they may be of some use to perhaps less sophisticated landlords or those who have not sought professional advice.
The Code finally provides guidance on service charges. Helpfully for landlords, the Code makes clear that service charges need to be paid in full by tenants unless otherwise agreed. The Code also goes on to identify how service charges might be managed in the months ahead, to recognise the financial impact these charges have on tenants’ finances.
What then to make of this new voluntary Code?
It is very difficult to disagree with its stated aims. However the problem a voluntary code could never overcome is the imbalance between the landlords and tenants respective negotiating positions given the current legal landscape. On the one hand, the government has legislated against landlords and removed all effective enforcement remedies. Yet tenants are only subject to a voluntary code of conduct. Tenants can, should they wish and with relative impunity, continue to withhold rent, refuse to engage and ignore the Code. Landlords have little choice but to accept that behaviour – at least until the legal enforcement restrictions are lifted.
The main battleground over the last few months has been with large or well-capitalised tenants who arguably can and should be paying the rent. Anecdotal experience suggests that landlords have, on the whole, been willing to support smaller non-trading business, particularly those tenants that have actively engaged and been honest and transparent. The voluntary nature of the Code may dilute the use and relevance when combatting those so-called ‘rogue’ tenants who continue to ignore the clear Government pronouncements and refuse to pay rent when they can and should.
The Code could perhaps have gone further in recognising the financial impact on landlords where tenants fail to pay the rent or service charge but in any event, hopefully the Code will prompt a change of behaviour from ‘rogue’ tenants; though any change would be driven by the tenant’s moral compass rather than imposed on them by law. Landlords’ behaviour arguably doesn’t need any prompting because the Government has legislated against them and forced their hand in any event.
The Code suggests mediation as a potential forum for resolution. Given that imbalance of negotiating power, it is difficult to see how the suggestion of mediation as a form of resolution will assist.
Potentially a key question is how the government will address the fact that tenants have remained liable for rents during this period and what will happen when the current legislation is reversed so that landlords have their usual remedies back. In that regard, the Code may well become more relevant when the enforcement restrictions are lifted and, from a legal perspective, there is a more level playing field.
In relation to service charges –anecdotally some landlords are now funding their own service charges because tenants are refusing to pay. This is clearly unfair when many of those services are being provided for the benefit of the tenant. landlords should of course consider what services are necessary at this time both for the benefit of the tenant and the property and of course not seek to profit from the service charge regime. Equally, if services charges are being reasonably incurred, it is equally reasonable that tenants are required to adhere to their own contractual obligations in the lease and pay what is owed. In that regard, it is good to see the Code reminds tenants of their obligation to pay in the absence of an agreement to the contrary. Taking that approach may encourage tenants to pay even though landlords can do little if the tenant chooses not to.
There could perhaps have been more explicit reference to lenders because they are a key part of the property food chain. If landlords are confident that lenders will not take steps should they breach their banking covenants then, in the short term at least, landlords may be less inclined to take action against their tenants once the restrictions are lifted.
It may also have been beneficial to include some reference to property insurers to ensure they are paying out on any business interruption claims under policies taken out in good faith.
There is no doubt that the Code is a useful reminder, particularly for landlords, to understand the financial pressures some tenants are under. It remains to be seen what practical impact the Code will have, both now and once the government reverse the current enforcement restrictions which are now in place until the end of September.
This article first appeared in CoStar.