Client Alert

UK Real Estate Sector Update

30 Jun 2020

Further to our article published on 1 May 2020 around Key Considerations for UK Commercial Landlords in light of COVID-19, we have seen, over the past weeks, a number of important updates in the real estate sector in an attempt to cater for the ongoing impact of, and disruption caused by, the COVID-19 pandemic. Whilst the UK is showing signs of emerging from the crisis, with businesses slowly re-opening amid the easing of Lockdown measures, there is no doubt that the impact on retail and property generally will be significant and only fully understood as the statistics relating to the June Quarter Day rent payment become known. At the time of publication, we understand that retailers in the UK have paid less than 15% of their rent, according to initial figures[1].

The three most relevant updates are:

  1. the extension of the forfeiture moratorium until 30 September 2020;
  2. the laying before Parliament of the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (No. 2) (Coronavirus) Regulations 2020; and
  3. the publication of the Code of Practice for commercial property relationships during the COVID-19 pandemic.
1. The extension of the forfeiture moratorium

As discussed in our previous note, the Coronavirus Act 2020 received Royal Assent on 25 March 2020 and introduced measures postponing a landlord’s ability to exercise its right of forfeiture in respect of non-payment of rent[2] against a business tenant[3] during the period commencing on 26 March and expiring on 30 June 2020. As predicted in our previous note, it was announced last week by the Government that this date will be extended until 30 September 2020 to prevent struggling companies from eviction over the summer.

2. Taking Control of Goods and Certification of Enforcement Agents (Amendment) (No. 2) (Coronavirus) Regulations 2020

The Taking Control of Goods and Certification of Enforcement Agents (Amendment) (No. 2) (Coronavirus) Regulations 2020 (SI 2020/614) (the “Regulations”) were made and laid before Parliament on 19 June 2020. The Regulations came into effect on 24 June 2020.

The Regulations[4] apply in England and Wales and increase the minimum net unpaid rent that must be outstanding before commercial rent arrears recovery may take place, to an amount equivalent to 189 days’ rent, while protections from forfeiture for business tenancies are in place under the Coronavirus Act 2020 (that is, until 30 September 2020). This was previously an amount equivalent to 90 days’ rent. This is intended to provide businesses with additional protection and flexibility in managing their finances during the COVID-19 outbreak.

3. The publication of the Code of Practice for commercial property relationships during the COVID-19 pandemic

On 19 June 2020, the government published a Code of Practice governing commercial property relationships during the COVID-19 pandemic (the “Code”). The Code applies to all commercial leases held by businesses that have been negatively impacted by the COVID-19 crisis, although it is likely to be most relevant to the hospitality, leisure, and parts of the retail sectors that have borne the brunt of the pandemic.

The focus of the Code is to help facilitate a fair and transparent discussion between landlords and tenants over rental payments and arrears. The Code sets out the expectation that landlords and tenants should share the costs and risks arising from the COVID-19 pandemic in an equitable and reasoned way.

The key points relating to the Code are that:

  • it is voluntary;
  • it acknowledges that, legally, tenants are required to pay the rent due under their leases, unless expressly renegotiated by agreement with landlords;
  • tenants who are in a position to pay in full are encouraged to do so;
  • where tenants are unable to pay in full, they should enter into discussions with their landlords to find a way to pay what they can afford; and
  • both landlords and tenants alike should act in good faith, reasonably, and flexibly.

The Code has been developed in collaboration with the retail, hospitality, and property sectors to provide a framework for discussions surrounding rental payments and to encourage best practice in a sector that has been in the eye of the COVID-19 storm, suffering unparalleled distress and uncertainty. The Code, and the signatories’ support of it, will apply until 24 June 2021.

The ministerial foreword to the Code states that the Code “sits alongside other measures, such as the moratorium on forfeiture of commercial leases and changes to Commercial Rent Arrears Recovery, statutory demands and winding up petitions, which provide tenant businesses the breathing space to work with landlords and other partners on a plan for a sustainable future. But these measures cannot last forever, which is why we have worked closely with leading business groups to publish this code of practice.

It further states: “Our transition back to normality will take time and government will continue to monitor the economy to determine whether further intervention is necessary. This code of practice represents a good starting point on our road to economic recovery.”

At paragraph 21, the Code states: “In considering a tenant’s request to renegotiate their rent, landlords may wish to bear in mind the impact of the following issues on the entire business of both the tenant and the landlord. This is not an exhaustive list, but could give an indication of the extent to which the tenant’s financial position has been impacted across their entire business:
a. Closure period impacting the tenant’s business, and ability to trade via other means;
b. Duration and extent of restricted trading due to social distancing requirements;
c. Extra costs and obligations through protecting customers to adhere to social distancing requirements;
d. Needs of other stakeholders such as banks, employees, suppliers during this period;
e. Government support received and how this has been used;
f. The tenant’s previous track record under its lease terms and any concessions to the tenant already agreed;
g. The impact that providing support may have on the tenant’s competitors and on other support already offered to tenants; and
h. Possible alternative considerations in a regulated sector. For example, pubs that are regulated under the Pubs Code.

The Code also considers service charge arrangements at paragraph 24. For example, it states that where there is a known net reduction in overall service charge due to lack of use of a property (taking into account any additional COVID-19-related costs), this reduction should be passed on to tenants as soon as possible ahead of the end of year reconciliation in order to help with cash flow and business viability.

According to the Communities Secretary, Rt Hon Robert Jenrick MP, it is hoped that the Code “will help unlock conversations on rent and future payments whilst ensuring best practice is displayed across the board as we confront the challenges of this pandemic”.

Please see the link below for full details of the Code:
https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector/code-of-practice-for-commercial-property-relationships-during-the-covid-19-pandemic

Conclusion

These recent measures are yet further attempts by the government to support struggling tenants and a clear indication that the government is unwilling to allow the many businesses and tenants who have availed themselves of the various Government-sponsored lending and furlough schemes (at a huge cost to the public purse) to fail. The road to post-pandemic economic recovery is unchartered territory, and each sub-sector of the real estate market will face its own challenges.

Please do not hesitate to get in touch with us at Morrison & Foerster so that we can help you and your business navigate this unprecedented and unpredictable landscape.


[1] Based on data from Re-Leased, a commercial property management platform.

[2] The definition of “rent” is broadly drafted to include any sums due under a lease, so not just annual rent but also service charge, insurance rent, and other outgoings.

[3] A “business tenancy” is one where property is occupied for the purposes of a trade or profession within the meaning of the Landlord and Tenant Act 1954 (“LTA 1954”), s 23, which provides that a tenancy is within the LTA 1954 if the whole or a part of the demised premises is occupied by the tenant for the purposes of his business or for those and other purposes.

[4] The Regulations amend measures introduced by the Taking Control of Goods and Certification of Enforcement Agents (Amendment) (Coronavirus) Regulations 2020 (SI 2020/451).

Close
Feedback

Disclaimer

Unsolicited e-mails and information sent to Morrison & Foerster will not be considered confidential, may be disclosed to others pursuant to our Privacy Policy, may not receive a response, and do not create an attorney-client relationship with Morrison & Foerster. If you are not already a client of Morrison & Foerster, do not include any confidential information in this message. Also, please note that our attorneys do not seek to practice law in any jurisdiction in which they are not properly authorized to do so.