A cash crisis has hit both landlords and tenants as a result of the coronavirus pandemic, with many commercial landlords receiving thousands of pound less in rent and service charges payments than they they are legally entitled to.

Not only are tenants struggling to pay because their business is on hold, many smaller landlords are struggling to live because they rely on their rental income to fund their retirement – they are themselves under increasing financial pressure. Also, many large property landlords are struggling to avoid breaching their loan covenants.

What’s more, those unfortunate landlords who were already struggling with bad tenants, unable to pay their rent, have had their eviction claims put on hold. The government has shut down the courts and given tenants an eviction amnesty which could result in some landlords waiting many months to eventually get their properties back.

With millions of residential tenants on furlough or working reduced hours, and with housing benefit only covering around 30pc of average market rents, the crisis has forced many thousands of residential tenants into missing rent payments. It has been estimated that around £3m of residential rent arrears has built up already, and this figure is will only rise as more jobs are lost and savings are depleted.

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With the arrival of the June quarter day commercial landlords are fearful that many tenants, some of who had previously come to arrangements with their landlords over reduced payments, will be faced with yet another crisis of whether to pay the rent or pay off other business priorities like wages.

The government to some extent has made thier decision easier because it has protected tenants from eviction, at least in the short-term. There will be other business priorities besides keeping up with the rent payments.

To try to help the situation for commercial landlord and their tenants the government in the guise of The Minister for Regional Growth and Local Government, Simon Clarke MP, has published a Code of Practice for Commercial Property.

It’s a voluntary code designed to help the relationship between landlords and tenants, all of who may be experiencing financial difficulties due to the Covid 19 virus.

It does not advocate non-payment when tenants can afford to pay. Those tenants who are able to pay should pay their rent in full, and continue to do so. But where tenants find themselves in genuine difficulty it is recommended that they get together with their landlords (social distancing of course) and it is expected that landlords will be flexible and provide whatever support they can.

The Code is voluntary and does attempt to change the law in any way regarding the legal relationship between the landlord and tenant. The Coronavirus Act 2020 moratorium on forfeiture, which the Government extending to 30th September, does change things somewhat, temporarily, but the contractual rights and obligations between the parties set out in a property’s lease still stand.

The code recommends that tenants set out their position to landlords in an open and transparent way providing documentary evidence where possible so that the parties may seek to settle on new temporary arrangements. In order for tenants to achieve concessions from their landlords they need to be clear as to why they are needed.

Landlords are being encouraged to concede concessions wherever they are able to and be similarly open and transparent if they are unable to do so. They should be prepared to set out clearly how and why they have reached their decision.

Although the government recognises that those sensible and reasonable landlords and tenants will already have been thinking along the lines proposed in the Code, it is thought that there is perhaps value in setting out clearly some of the options available to help with negotiations. These have been set out below and provided by the Code:

a. a full or partial rent-free period for a set number of payment periods

b. a deferral of the whole or part of the rent for one or more payment periods

c. the payment of the rents over shorter payment periods for a set time (e.g. monthly rather than quarterly) including provision for their payment in arrears

d. rental variations to reduce ongoing payments to a current market rate and/or to provide for all or part of the rent to be paid as a proportion of turnover of the site, incorporating any period during which the site was closed

e. landlords drawing from rent deposits on the understanding that the landlord will not then require that the deposits be “topped up” by the tenant before it is realistic and reasonable to do so

f. reductions in rent, either in whole or part, across other units occupied by the tenant and owned by the landlord, as part of a negotiated agreement applying to a portfolio of units

g. landlords waiving contractual default interest on unpaid rents or rents paid in arrears to make payment plans more affordable

h. provisions for ending the solutions on a fixed date, or on reaching the trigger point of particular circumstances

i. tenants and landlords agreeing to split the cost of the rent for the unoccupied period between them

j. any of the above in return for other arrangements e.g. a reversionary lease on reasonable terms, the removal of a break right in favour of the tenant, or an extension of the lease

Code of Practice for commercial property relationships during the COVID-19 pandemic

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1 COMMENT

  1. Landlords can keep their tenants and absorb rent reductions with mortgage holidays and/or by remortgaging, thereby spreading the cost in the long run.
    The Code of Practice key message is that it is in the best interest of both landlords and tenants to reach an agreement, as we have also pointed out previously for residential landlords: a good deal is better than a bad debt (https://www.renthappily.co.uk/news/rent-arrears-are-a-time-bomb-ticking).
    By spreading the repayments over the term of the mortgage, the landlord recovers the cost of the mortgage holiday through future rents at a minimum cost.
    Mortgages being a long term credit, it just makes sense to transfer the payment deferral to the future, so that neither the landlord nor the tenant is in arrears. By deferring the payment, the tenant gets a breathing space, and the landlord squares even in the long run. This way, the landlord can accommodate not only the mortgage holiday, but also any potential reduction in rent, making the rental of the property viable in the long run.

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