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What is this week's blog about?
In this week’s blog, we take a look at the Government Code of Practice for Commercial Property Relationships during the Covid-19 Pandemic. This is essential reading for all RICS APC and AssocRICS Commercial Real Estate candidates, as well as those on other pathways who provide advice on commercial property.
A full copy of the Code of Practice can be downloaded here.
When was the Code of Practice published?
The UK Government published the Code of Practice on 19 June 2020, just prior to the June quarter day.
When will it apply until?
The Code of Practice is currently planned to remain in force until 24 June 2021.
Why was the Code of Practice published?
The Code of Practice sets out best practice guidelines for landlords and tenants in relation to rent and service charge arrears during the Covid-19 pandemic.
This is a challenging area as landlords rely on secure rental incomes and tenants are facing challenges in their ability to pay. In particular, where commercial properties are leveraged, loan covenants are likely to be breached and this risks repossession by lenders. There is also a risk to pension income where commercial properties are held as investments by large pension funds.
RICS research found that, on average, only 57% of rent was collected 7 days after the March 2020 quarter day. This rose to 70% after 28 days, in comparison to 99% in the same period in 2019.
What are the aims of the Code of Practice?
The Code of Practice encourages parties to work collaboratively and flexibly, in an attempt to mitigate some of the financial challenges presented by the Covid-19 pandemic.
The aim is to ensure that tenant businesses remain viable and can continue to trade throughout the pandemic. This provides clears benefits to both landlords and tenants. It will also avoid significant voids being created and the incumbent difficulties with seeking to relet premises in current market conditions.
Who does the Code of Practice apply to?
The Code of Practice is not legally binding; it is a voluntary set of best practice guidelines for landlords, tenants and agents to follow. It has been endorsed by a number of professional bodies and organisations, including RICS, British Chamber of Commerce, British Property Federation and the British Retail Consortium.
What are some of the key guidelines in the Code of Practice?
Tenants who can afford to pay rent and service charge in full should do so
Tenants who cannot afford to pay rent and service charge in full should pay what they can reasonably afford, with reasonable and flexible payment plans agreed between the parties
Tenants should provide evidence to justify their requests for any concessions, in addition to making their own reasonable concessions, e.g. offering an extended lease term in return for a reduced rent (i.e. lease engineering or re-gearing)
Landlords should provide support to tenants as far as they reasonably can. Refusal or inability to grant any concessions should be clearly explained to tenants, with reasons given
The parties should work collaboratively, using available Government resources, renegotiating rents or granting reasonable concessions where possible to mitigate the impact of Covid-19
Landlords should seek to reduce service charges where operational costs are reduced due to lower property usage by tenants during the Covid-19 pandemic. However, some costs such as cleaning may increase to ensure that COVID-secure environments can be provided
Any reduction in service charge costs should be passed to tenants as soon as possible, i.e. before the end of year reconciliation, to facilitate cashflow
What other RICS guidance is relevant?
The Code of Practice sits well alongside the RICS Professional Statements, Code for leasing business premises and Service charges in commercial property. These should be read and complied with, as mandatory requirements, by all RICS Members and Regulated Firms.
How can parties resolve disputes relating to the Code of Practice?
RICS have launched a Covid-19 Commercial Rental Independent Evaluation Service. This is a method of Alternative Dispute Resolution that seeks to resolve the dispute between the parties amicably.
Property Elite also offer commercial property mediation services via Accredited Mediator and co-founder of Property Elite, Jen Lemen’s, RICS Regulated Firm, Projekt.
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Stay tuned for our next blog post to help build a better you.
N.b. Nothing in this article constitutes legal, professional or financial advice.