The UK government has announced that it will be launching a new “code of practice” for commercial landlords and tenants to govern their discussions over rent payments during the coronavirus pandemic. The code will be launched before the next rental quarter date later this month when a large number of landlords expect rental collection to be down on the last quarter.

The code is intended to encourage collaboration between landlords and tenants and to ensure that support is available to the businesses most in need of it, hopefully addressing what many perceive to be an imbalance created by the moratorium on landlords taking action against their tenants that was introduced by the Coronavirus Act 2020. That moratorium is widely expected to be extended beyond its current end date of 30 June 2020 and so the code will operate alongside that regime. The code will be voluntary and temporary in nature, but the government has said it will explore options to make it mandatory if necessary.

But, as landlords balance the negotiations with their tenants and the negotiations they are having at the same time with their lenders regarding their debt service and financial covenant obligations, how might the proposed code impact the way that lenders approach those negotiations?

UK Finance has confirmed its members’ continued support for amendments to facilities and capital payment holidays for commercial landlord borrowers, but has also re-iterated that the benefit of payment holidays should be passed onto tenants. If widely adopted, the code should ensure that landlords are able to agree rental payment holidays, or negotiate other rental concessions, with those tenants who are unable to pay. Those tenants who are able to meet their rental obligations, whether in whole or in part, are strongly encouraged to do so. 

Lenders are increasingly being asked by their landlord borrowers for more flexibility than their facility documents will typically afford to deal with tenants directly, so that lenders’ consent is not specifically required for any short term concessions agreed with tenants. 

The code should offer some comfort to lenders that if they agree to give such flexibility, it will be used by their borrowers to agree terms with their tenants which are proportionate and targeted to those tenants most in need of it. However, with the expected extension of the moratorium against forfeiture proceedings, tenants who can pay but don’t want to pay in order to protect their own liquidity will continue to have a lot of leverage in negotiations with their landlords and so the code’s impact may well be more limited.