On 01 October 2020 the Department of Business, Enterprise and Innovation published the “Code of Conduct between Landlords and Tenants for Commercial Rents” (the “Code”). The publication of the Code had been promised as part of the Programme for Government when the current administration came into office in June 2020.
The Code has no statutory basis and its operation is voluntary. It does not create any binding legal obligations except where both landlord and tenant agree to operate it. In other words, it does not of itself change any underlying legal relationship or commercial leases between landlords and tenants.
To underpin this the Code acknowledges that commercial leases are primarily a matter for the parties involved and all parties are obliged to meet existing obligations unless there is an agreement to vary or re-negotiate those existing obligations.
Mutual Benefits of Compromise
The Code is drafted on the basis that landlords and tenants have a shared common interest in working together to reach mutually satisfactory outcomes and to enable otherwise viable businesses to survive economic hardship and to facilitate the resumption of normal trading activities through a period of recovery.
It is an overarching principle of this Code of Conduct that landlords and tenants act “reasonably, swiftly, transparently and in good faith” to identify and implement mutually beneficial solutions that off-set the impact of Covid-19 on both parties. Landlords are encouraged to be open to the mutual benefits of compromise rather than relying on strict legal rights and promotes mediation as a means of reaching agreement or compromise on any issue that might otherwise lead to dispute.
The Code promotes reasonable co-operation, communication and compromise and sets out practical ways in which landlords and tenants might engage to alleviate strain on tenant businesses and implement mutually beneficial solutions.
For example:
- tenants are encouraged to meet their contractual commitments to landlords where they reasonably can;
- when seeking concessions tenants are encouraged to be open, honest and clear as to their needs and to provide sufficient and accurate financial and other information to enable landlords to properly consider the request;
- in response to a tenant request for concessions landlords are encouraged to provide concessions where they can, and where they don’t, to provide a clear and reasonable explanation for the refusal; and
- where landlords have obtained the benefit of a loan deferral or other such provision from a lender they are encouraged to share that benefit proportionately with tenants.
Issues, suggestions & arrangements
The Code provides a non-exhaustive list of issues which landlords should bear in mind when negotiating with tenants. Such issues include any closure period that impacted the tenant’s business, any restrictions on trade and the tenant’s previous track record. The Code also provides a non-exhaustive list of suggestions and arrangements that parties could enter into to deal with the shock of the pandemic. Such suggestions include a full or partial rent-free period, a rent deferral and rental variations to reduce the rent to a market rate or to be tied to onsite turnover.
Service charges and insurance payments are subject to a number of express statements in the Code. These are acknowledged as non-profit making payments to landlords and so should be paid in full by tenants. However, landlords are encouraged to pass on reductions due to lack of use or occupation (and by way of refund if possible, rather than credit to assist with tenant cash flow) and to ensure that service costs reflect actual work done and best value for tenants.
The Code does not set out a standard procedure under which landlords and tenants should engage in the event that a renegotiation of commercial terms to a lease is sought. However, the Code does state that all parties should act in good faith, reasonably and flexibly
The Code acknowledges the practical effect that landlords may not (even where willing) be able to re-negotiate commercial terms with tenants due to restrictions or other requirements imposed by lenders, investors and superior landlords. However it is interesting to note that the Code does not attempt to encourage lenders, investors and superior landlords to engage with landlords and tenants in any re-negotiation of commercial terms and this to an extent does undermine the impact of the Code.
Shared Interest
The Code reflects the reality of what many landlords and tenants have been doing over the last several months. It remains to be seen, however, how long that shared interest can continue the longer the current circumstances continue.
Whilst the Code is non-binding and voluntary it will be interesting to see how the Courts interpret it and seek to import principles set out in the Code into resolving disputes between landlords and tenants. The Code does recognize that disputes may end up in this forum or the other dispute resolution mechanisms provided for in commercial leases..
The Code is intended to remain in place until the 31 July 2021. It will be interesting to see what changes in the status of the Code may be implemented then and whether or not it is given any statutory footing. This may largely depend on how the principles in the code are voluntarily adopted by landlords and tenants before then and the continuing effect of the pandemic into the future.
Professional advice should always be taken before acting on any of the matters discussed. Please contact a member of our team should you wish to discuss this topic further.
