Code of Practice for commercial property debts

The Code sets out the government’s principles for dealing with commercial property debts accrued during the COVID-19 pandemic (“ring-fenced” debts), and provides a framework for negotiating rent concessions. The full code can be found here: Code of practice for commercial property relationships following the COVID-19 pandemic - GOV.UK (www.gov.uk)

A previous article has already covered the draft Bill.  This article should be read as a companion piece, as the Code’s stated aim is to resolve most disputes before the Bill comes into force in March, as well as disputes which are outside the scope of the Bill.

The Code encourages landlords and tenants to attempt negotiation over commercial property debts and, although the Code is not mandatory, its early adoption is recommended for the reasons given below.

Key Principles under the Code

What does the government want to happen?

The Code sets out the government’s key principles in introducing the Code and Bill:

1. the guiding aim is to preserve viable businesses;

2. preserving viable businesses should not come at the expense of the landlord’s solvency; and
3. if tenants can afford to meet their obligations, they should – relief is only to be given where tenants genuinely cannot afford to pay without it.

The base assumption is that if a tenant cannot afford to meet their obligations, their landlord is expected to waive some or all of the ring-fenced debt in the interests of preserving viable businesses and jobs.

Conversely, a tenant who can afford to meet their obligations is expected to do so, even if this is commercially painful – which is likely to be some comfort for landlords.

When are rent concessions expected to be made?

The Code consistently cites two key factors in whether (and what) rent concessions may be appropriate:

• Viability – without the ring-fenced debt, can the tenant meet its obligations and continue trading?
• Affordability – if the tenant is viable, what can it afford to pay in the near future?

A viable business which genuinely cannot afford to meet its obligations is expected to have some of its ring-fenced debts waived, unless doing so would threaten the landlord’s solvency.

(Regarding affordability, note also that the Code says tenants must not be obliged to incur debt or restructure their business in order to “afford” a payment.)

The Code is broader in scope than the Bill, and these principles will apply to businesses which are not covered by the mandatory arbitration scheme - for instance, those which were not shut by law but argue their trading was impacted by the pandemic.

Negotiation

The Code encourages all landlords and tenants to attempt negotiation where the tenant is unable to pay in full, regardless of whether the debts are within the scope of the Bill.

What do tenants have to prove?

Viable tenants are expected to show sufficient evidence to landlords:

1. that their current obligations are unaffordable; and
2. of what they could afford in the near future (meaning no longer than the next 2 years, and preferably sooner).  

The landlord is entitled but not expected to evidence their own financial situation, including the impact of having a portfolio of tenancies many or all of which in arrears.

Again, negotiations under the Code should not affect the landlord’s solvency and this is a reasonable ground for denying or reducing relief to even a viable tenant.

How are parties expected to behave?

The Code expects both landlords and tenants to actively exhibit transparency, collaboration, responsibility and reasonableness when negotiating as well as arbitrating. 

Landlords and tenants are expected to resolve disputes as swiftly as possible, and help and support each other in dealing with other stakeholders (eg. utility companies, banks, and financial institutions).

Arbitration

Paragraph 67 and Annex C of the Code set out details of the mandatory arbitration scheme which will be brought into force by the Bill (subject to any amendments as the Bill moves through Parliament).

Some key points from the proposed process:

• The mandatory scheme will include a compulsory pre-application stage where the parties provide proposals and evidence.
• Arbitration will focus on parties’ proposals for dealing with ring-fenced debt, with the arbitrator picking the one that most complies with the principles.
• Parties can elect to have a public hearing (no longer than 6 hours) or a paper-only process.
• The process is intended to be swift – parties could go from initial notification to a binding award in as little as 2 months.
• Arbitration fees are to be set on a sliding scale by the arbitration bodies, though the Secretary of State will have the power to cap fees.

Although the Code is not mandatory, arbitrators under the scheme will base their awards on the Code, its key principles, and whether the parties behaved as expected in prior negotiations.

Next steps

The intent behind the Code is clearly for landlords and tenants to begin negotiating now, before the Bill comes into force.

Some commentators have expressed concern that with mandatory arbitration on the way and debt claims barred, there may be little incentive for tenants to negotiate. There is also a general sense that the Bill as proposed is very tenant-friendly.

Certainly, landlords expecting to recover all of their arrears by default will be in for a shock. The Code does expect them to write off debts to preserve viable businesses; arbitrators (and presumably courts in cases outside the Bill’s scope) will seek to enforce this principle.

However, there are some positives for landlords to take away from the Code:

1. tenants who can afford to pay but are refusing are likely to receive little support, and will likely have to pay arrears in full;
2. the Code offers protection for landlords who are genuinely at risk of insolvency if concessions are given, provided they can evidence this; and
3. the Code applies only to viable businesses, and does not protect tenants whose businesses have not recovered since the end of lockdown.

We will continue to monitor both the Code and the draft Bill, and report further on any details that emerge.