On 1 October 2020, the Government published its Code of Conduct between Landlords and Tenants for Commercial Rents (the Code). The Code applies to all commercial tenancies that have been seriously impacted by the COVID-19 crisis and will apply until 31 July 2021. It has been developed by the Department of Business, Enterprise and Innovation (DBEI) in consultation with other Government departments, state agencies and key stakeholders representing both commercial landlords and tenants.
The Code is voluntary and does not affect any existing legal relationship or commercial lease contracts. It has no statutory basis. The purpose of the Code is to promote and reinforce good practice in landlord/tenant relationships as they seek to mitigate the impact of the financial fallout created by the pandemic.
The Code clearly notes that tenants who are in a position to pay their rent in full should do so, recognising that landlords have their own financial obligations to meet.
Tenants who are experiencing difficulties in meeting their financial and/or contractual commitments should approach their landlords to discuss a request for assistance. Tenants seeking to negotiate new arrangements should be clear as to why such assistance is needed and should provide financial information to support this.
The Code notes that landlords should assist tenants where reasonably possible and should endeavour to facilitate those tenants who are in greatest need. However, it is recognised that a landlord’s ability to offer flexibility to tenants may be constrained by their own financial obligations. While the Code suggests that landlords should provide concessions where they can, it notes that where this is not possible, landlords should provide a reasonable explanation of their decision which considers the information provided by the tenant.
The Code sets out overarching principles which should be taken into consideration by both landlords and tenants when looking to negotiate new commercial arrangements. They include:
- that the parties should act in good faith and in a reasonable and transparent manner;
- landlords and tenants should try to assist each other in all their dealings with other stakeholders including government agencies, utility companies and financial institutions; and
- where either landlord or tenant has received COVID-19 related subsidies or reliefs, it should be recognised that this assistance has been provided by the Government to help businesses meet their commitments.
The Code recognises that in some cases, having followed the principles set out in the Code, landlords and tenants will be unable to reach a specific agreement but may still feel that a negotiated outcome could be achieved. In these instances, the Code suggests the parties may consider mediation, provided that any mediation process should not prolong or hinder the reaching of an amicable resolution.
The Code provides a non-exhaustive list of issues which the landlord may wish to bear in mind when considering a tenant’s request to renegotiate their rent, including:
- any closure period impacting the tenant’s business, and ability to trade via other means;
- the duration and extent of restricted trading due to social distancing requirements;
- added costs incurred through measures to protect employees and customers and to adhere to social distancing requirements; and
- Government assistance received and how this has been used.
Where a concession is being considered, the Code provides a non-exhaustive list of suggested options for new arrangements, including:
- a full or partial rent-free period for a set number of payment periods;
- a deferral of the whole or part of the rent for one or more payment periods;
- the payment of the rent over shorter payment periods for a set time (e.g. monthly rather than quarterly) including provision for their payment in arrears;
- 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.
Service & Insurance Charges
Many service charges continue to be incurred by commercial landlords and it is important that buildings continue to be insured and safely maintained. The Code notes that as any service charge and insurance charge payable under the lease is not profit-making, unless otherwise agreed, such charges need to be paid in full.
However, recognising the impact this may have on tenants’ finances, the Code sets out a list of potential concessions which may be agreed between both parties in relation to service and other charges. For example, it is suggested that any reduction in statutory charges (e.g. local authority rates) or insurance should be passed on to the tenant in the appropriate proportion applicable under the terms of the lease.
The Code should not be seen in isolation, but rather as part of the suite of measures the Government has put in place to assist firms through the crisis including the July Jobs Stimulus Package.
It is also important to remember that the Code is voluntary in nature and does not affect any pre-existing agreements. Each party to a commercial lease remains obliged to meet the terms of that lease unless a renegotiation is achieved, and any such renegotiation must be agreed in accordance with the terms and conditions of the existing contract. While the Code provides suggestions for how to agree new arrangements, the relationship between landlord and tenant is a legal matter and parties may wish to seek legal advice when negotiating new arrangements.
Please contact Brian O’Callaghan or your usual William Fry contact for help or advice about the Code of Conduct for Commercial Rents. For guidance on a range of issues affecting your business, see our COVID-19 Hub.
Contributed by Órlaith Ní Mhadagáin, Ultan Murray