Supporting commercial landlords and tenants through COVID-19 rent crisis

COVID-19 is having a major impact on the UK commercial property sector.

Landlords fear losses on their investments, which impact on pensions and savings for ordinary working people. On the other hand, many tenants have not been able to conduct their businesses for months and many are struggling to pay their bills and maintain their livelihoods.

There are signs that relationships between landlords and tenants are becoming increasingly tense. There is genuine concern within government that these tensions will turn into polarisation leading to a “pandemic” of conflict and strife, which would cause immense damage to the market.

The government has been quick to recognise the danger and act. Its first action has been to publish a voluntary Code of Practice for the commercial property sector in June. The stated aim of the Code is to help tenants and landlords work together to make it through the Covid-19 pandemic. It is, in essence, an appeal to landlords and tenants to behave responsibly and adopt a unified approach to dealing with the crisis. All sides should recognise that the market is in trouble and the consequences of failing to respond appropriately could be dreadful for everyone.

A key message from the government is that it is in the interests of both landlords and tenants to do everything reasonable to enable otherwise viable businesses to continue operating during the recovery. In other words, instead of arguing with each other, landlords and tenants must recognise that they are economic partners, not opponents. They should endeavour to help and support each other through these difficult and uniquely challenging times. This requires landlords and tenants to adopt a fresh way of doing business with each other. They need to innovate to achieve temporary, and where possible, sustainable solutions to the problems that have been caused by the Covid-19 emergency. This will involve discussing and agreeing arrangements which are outside the existing letter of their leases.

The Code needs tenants to feel able to approach their landlords to discuss requests for support. Landlords should be willing to consider reasonable cases put forward by tenants who are in distress, and whether they can offer reasonable temporary arrangements to enable tenants to survive. Discussions should be fair and transparent between landlords and tenants over rental payments during the Covid-19 emergency and going forward as the market re-sets. The objective is to enable collaboration and cooperation within the sector and ensure no one part of the chain shoulders the full burden of financial and other pressures caused by emergency.

A major challenge for the government is to get all sides to embrace the Code and actively adopt its main principles. However, the current tension and distrust between landlords and tenants means that their discussions around rental arrangements going forward are likely to need some form of facilitation to progress and succeed. Without help, many negotiations will stall as one or both parties becomes entrenched.

Paragraph 18 of the Code recognises this potential obstacle to negotiated arrangements and recommends that parties use independent “mediation” to help structure and smooth the negotiations. In the light of this, RICS has consulted with both landlords and tenants and what emerges is:

• a pressing need from tenants for a ‘safe space’ to articulate their difficulties and to have these recognised by their landlords
• A need from landlords for a dispute resolution process rigorous enough to separate tenants who genuinely cannot pay from those using the crisis as an excuse for not doing so.

The solution RICS has developed is an evaluative approach to mediation, which is called the Commercial Rental Independent Evaluation Service (CRIES).

It creates the opportunity for a clear, balanced dialogue between a landlord and tenant that is facilitated by a neutral subject area expert, an evaluator.

The evaluator develops an incisive analysis of the tenant’s grounds for non-payment and the landlord’s prerequisites for making concessions. the process gives both sides an opportunity to scrutinise proposals and the documentation on which they are based. The evaluator helps to maintain a balance between the parties in their negotiations and ensures the final decision on how to proceed is kept within their control and is made on a properly informed basis, taking into account the impact of the Covid-19 crisis.

With the government’s moratorium (which precludes landlords from forfeiting commercial leases and evicting their tenants for non-payment of rent) coming to an end in May (subject to change), this service will be more relevant than ever.

For more detailed information about the Commercial Rental Independent Evaluation Service click here.