Code of practice for the commercial property sector

Today’s publication of a Government code of practice for commercial landlords and tenants underlines the scale of the economic impact of Covid 19 on the sector, and the need for clear leadership, engagement and transparency.

As a professional body with members working on all sides of the property market, RICS is uniquely placed to consider the competing priorities, and focus entirely on achieving an outcome that is in the public interest.

RICS has played a leading role in helping to shape the code and is fully supportive of it. It is consistent with the established principles in our existing guidance for the sector and will provide a basis for negotiated outcomes that recognise the mutual importance and interdependence of landlords and tenants in contributing to the economy.

Leadership in unprecedented times

The impact of the Covid-19 pandemic has been profound on the UK, with the initial health crisis now fully transformed into an economic challenge the like of which we have never seen. This reaches into every sector that our profession works in and is being keenly felt by all who work in commercial property, with potential financial problems faced by both landlords and tenants alike.

Underlying structural pressures across the real estate landscape are being exacerbated by the sharp cyclical downturn. This may be most visible in the retail space with an acceleration in the trend from the physical experience to the digital. However, RICS indicators are also highlighting a potentially very significant shift in the demand for office space as business revenues come under severe pressure and the appeal of a more agile form of working grows. In short, our town and city centres are going to look and feel very different.

RICS has recently worked with cross industry stakeholders and Remit Consulting to develop clear data on the scale of the problem. The research included more than 80,000 leases and spanned the retail, office, industrial and residential sectors.

The data from the March quarter day shows that by seven days post quarter, only 57% of rent had been collected on average, rising to 70% after 28 days. By comparison, last year 99% of rent had been collected during the same time frame.

This has had a huge impact and has provided the momentum and urgency for the new Code.  Many landlords are often small businesses who are highly leveraged, and the larger ones tend to be the bigger institutional funds that help support most pensioners through their pension funds.

RICS has worked with Government from the start of the crisis to both identify and understand the problem, and then collaborate with others from across the sector to try and achieve some common ground. We have been part of the steering group at the Ministry of Housing, Communities and Local Government (MHCLG) which has developed a Code of Practice for commercial property. That Code is launching today with RICS support.

What you need to know about the code

The Code recognises that the current position places a huge burden on all parties – occupiers and owners – and RICS encourages all parties to work together on a case-by-case basis to recognise these challenges and create an approach that is proportionate and appropriate for each set of unique circumstances.

The Code sets out some critical principles, namely:

• Tenants who are in a position to do so should pay in full, and tenants who are unable to pay in full should be willing to pay what they can reasonably afford. This will help ensure that as many of those in distress as possible can be given landlord support. 
  
• Landlords should be willing to provide support to businesses to the extent that they reasonably can, so that viable businesses affected by the current circumstances are able to continue.  
  
• Both parties should take into account the impact of any changes to the long-term viability of the businesses. They should also consider any resources that may be available to them and, having regard to their duties and other stakeholders, be willing to consider renegotiating rent where possible to ensure the continuation of viable businesses.
  

 

The COVID 19 crisis and the development of this industry response have served to highlight the critical nature of the need for all parties in the sector to approach negotiations in a collaborative and constructive manner.

RICS guidance recognised

This approach by government is entirely consistent with the RICS position developed over a number of years and clearly set out in our Professional Statement, the Code for Leasing Business Premises.

This RICS professional statement is the result of pan-industry discussion between representatives of landlords, tenants and other trade bodies with the stated objective of to improve the quality and fairness of negotiations on lease terms.

As we move forward from COVID 19 it is essential for our economic recovery and performance that we all work to ensure lease negotiations for commercial tenants, landlords and guarantors not only offer flexibility to suit current market trends but are transparent and clear to understand.

It is encouraging that the collection of service charges is also recognised as an essential requirement in ensuring that buildings are operational and safe.

The new government Code recognises that the RICS Professional Statement on Service Charges in Commercial Property provides the best practice for the industry to work to with its stated aim to promote best practice, uniformity, fairness and transparency in the management and administration of services charges in commercial property for the benefit of all parties.

Effective dispute resolution

Clearly, the issues presented by Covid-19 will not all be addressed by the introduction of this Code and disagreements will remain to be resolved.

For over four decades RICS has been the leading UK provider of independent arbitration for rental disputes, and the RICS President’s Panel has unparalleled experience in dealing with negotiations between landlords and tenants in challenging situations.

To assist landlords and tenants comply with the Code of Practice, RICS is offering a specific Covid-19 Commercial Rental Independent Evaluation Service

RICS has consulted with both landlords and tenants and what emerges is:

• A pressing need from tenants for a ‘safe space’ in which to articulate their difficulties and to have these recognised by their landlords
  
• An equal need from landlords for an analytical and incisive 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 neutral RICS Independent Evaluation Service is designed to ensure that arguments are scrutinised fully and effectively and that workable settlements are achieved quickly and inexpensively.

Conclusion

We are pleased to have helped Government in shaping this code which will increase constructive engagement and transparency between landlords and tenants at this challenging time.

We believe it supports the principles established in our existing suite of standards for the sector and will provide a basis for negotiated measures which recognise the mutual importance and interdependence of landlords and tenants in contributing to the economy.

Effective dispute resolution will be key to delivering fair outcomes and RICS can assist in delivering this through its dedicated service. 

Applicability in Scotland

The Scottish Government Minister for Public Finance and Migration, Ben Macpherson MSP, has issued an open letter to the commercial sector in Scotland regarding the code of practice for commercial property relationships during the coronavirus pandemic. RICS has been liaising with the Minister and departmental officials, and welcomed the letter which can be found here.

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