Bill Meldrum: New code of practice for commercial property should guide negotiations

Bill Meldrum

Bill Meldrum presents the five key principles that should focus landlords’ minds around how they interact with commercial tenants.

The UK’s commercial property sector faces its own set of challenges due to the uncertainty that the COVID-19 pandemic has brought to our world.

However, the recent introduction of new UK government guidance should offer a helpful benchmark to landlords and reassurance to tenants when navigating many common challenges facing both parties in these troubled times.

Despite the great care and attention that business owners are taking, many in the commercial property sector may not have noticed the introduction of a new Code of Practice that directly affects the way they should conduct their affairs.

The recently-published ‘Code of Practice for Commercial Property Relationships during the Covid-19 Pandemic’ – is designed to guide the relationship between landlords and tenants through these changed and challenging times.

This is guidance and is not legally binding, but all parties would be well advised to take heed as any court ruling in a dispute may well have more sympathy for whichever side adhered to its principles. It will remain in force until June 2021.

There are five key principles, which should focus landlords’ minds around how they behave and interact with commercial tenants to create a collaborative rather than combative approach to debt recovery. These are:

  • transparency and collaboration to encourage reasonable, swift and transparent behaviour;
  • a unified approach to help both parties deal with other stakeholders such as financial institutions and utility companies;
  • recognition that government support in the form of subsidies is to help businesses meet commitments including rent and other property costs;
  • to act reasonably and responsibly to identify mutual solutions and finally;
  • to recognise that, where no agreement can be reached, a third party mediator may be employed to help facilitate negotiations.
This code is strongly backed by the Scottish government. Minister for Public Finance, Ben Macpherson, has described it as a useful tool to help landlords and tenants reach agreements that are ‘flexible in the short-term and sustainable in the longer-term’.
That long-term view is important. Where does that leave landlords who want to terminate (irritate) a lease because of breaches to its conditions? Our view, pre-empting the new code, was that full and frank discussions needed to take place to avoid potentially long-term and damaging fallouts.

On a more practical level, there have also been changes to the time periods to remedy monetary and non-monetary breaches. The Coronavirus (Scotland) (No 2) Act 2020 has extended to 14 weeks the time tenants have to pay any sums due, including interest. It was previously 14 days.

This does not mean irritancy has been abolished and tenants should not use the pandemic and economic chaos it has caused as a free pass. In the spirit of the code and during discussions with landlords, we have found the smaller ones adopting a slightly harder line around payment.

There is, generally, more financial pressure on them, while more financially established players in the market can afford to take a more tolerant view. For all landlords, though, the key going forward is dialogue and if a tenant can only afford a percentage of their rent, surely in most cases it would be wise to accept that? Finding new tenants in the current climate could be an issue.

The explosion of ‘staycationers’ is very welcome to some, but any recovery may be fragile once the full impact of the end of the furlough scheme kicks in with many worrying about possible redundancy. That said, there are signs of hope.

From a landlord’s perspective, the new Code of Practice provides some guiding principles to adhere to when navigating difficult discussions with tenants facing financial challenges due to Covid-19.

From a tenant’s point of view, the code will provide reassurance that landlords have a duty to behave in a fair, reasonable way throughout the crisis. How this requirement for reasonable behaviour is interpreted remains to be seen.

As we all get used to a different approach to business negotiations, it is clear that open and honest discussions at the earliest opportunity, combined with a more flexible attitude, will serve all parties best.

Bill Meldrum is a partner at Murray Beith Murray. This article first appeared in The Scotsman.