A key issue for multi-national owners and occupiers of real estate at any time is the differing legal and market position between jurisdictions. At no time has this been more pronounced than during and after COVID-19 related disruption.
A number of jurisdictions are encouraging good practice between landlords and tenants by introducing voluntary codes of conduct, in some cases in response to industry pressure.
Such codes of practice are in operation in England, France and The Netherlands, for example. However, although their ultimate objective to balance the market may be similar, they have differing terms and have received varying responses.
In this briefing note, our experts from England, France and The Netherlands assess the codes' provisions and market impact.
England & Wales - Stefanie Price, Partner
On 19 June 2020 the UK Government published a temporary, voluntary and non-binding Code of Practice to encourage fair and transparent discussions between landlords and tenants over rental payments during the coronavirus pandemic and to include guidance on rent arrear payments. It followed a period of discontent between landlords facing significantly reduced rent receipts and government imposed rent recovery restrictions, and tenants alarmed at the refusal of some landlords to consider concessionary rent arrangements to soften the financial impact of lockdown.
The Code applies until at least 24 June 2021, and makes the following recommendations:
- Tenants should continue to pay their rent, or as much of it as they are able to pay, whilst landlords are encouraged to react sympathetically to tenant's financial constraints where possible;
- Tenants seeking rent concessions should be prepared to provide appropriate financial information in support of their request;
- Landlords should grant concessions to affected businesses to the extent they can, having regard to their own financial commitments; and
- Agreement of a formal written rent payment plan between lease parties is recommended.
Insurance and service charge
- Tenants should continue to pay insurance and service charges in full, and in priority to the rent payments where necessary;
- Service charges should be reduced where lack of use of the property has reduced the service costs; and
- Where extra services are required and/or additional service costs incurred, for example where necessary to comply with COVID-19 health and safety requirements, landlords should ensure that service costs are reduced where reasonably possible, and frequency of service charge payments spread over shorter periods.
Landlords and tenants have been considering concessionary rent arrangements, such as rent freezes, reduced rents, switching to turnover only rents or alternative rent payment periods, since lockdown occurred, though not always to the satisfaction of tenants. In our view, the new Code of Practice introduces little of substance that adds to what is already being done within the commercial property market, though may serve as a reminder to both sides of the letting process to play fair.
France - Hervé Jégou, Partner
The French Government appointed a mediator (Jeanne-Marie Prost, former national mediator for business credit) whose role was to find a solution to lighten the burden of small businesses who have difficulty in satisfying payment obligations. The appointment was an effort to mitigate the impact of institutional landlords with large portfolios who refuse to cancel the rents of small businesses.
After a period of consultation, a "Charter of good practices between Retailers and Landlords to deal with the COVID 19 crisis" was drawn up on 3 June 2020.
The main principles of the Charter involve:
- Recommending that landlords grant a deferral or franchise to tenants equal to three months' rent;
- Recommending that tenants pay their rent for the second and third quarters of 2020;
- Recommending that any deferral or franchise be granted on rents only and that tenants continues paying taxes and service charges;
- Recommending the organisation of meetings between tenants and landlords between 1 June and 1 October 2020, with the aim of reaching an amicable agreement; and
- Requiring tenants to provide landlords with financial information to provide a relevant analysis of its situation.
However, the majority of tenants' organizations have rejected the Charter. They allege that landlords' efforts were not sufficient, considering the magnitude of loss suffered by tenants due to the COVID-19 pandemic and the closure of retail stores.
Netherlands - Fedor Tanke, Counsel and Amadeo Dreesmann, Associate
Under Dutch law, both the tenant and landlord have the obligation to act as good lessee and good lessor (goed huurder, goed verhuurder). Furthermore, Dutch leases are governed by the principle of reasonableness and fairness (art. 6:248 Dutch Civil Code). Any given clause may eventually be held inapplicable if it would contradict this principle.
On 10 April 2020 a covenant (steunakkoord) was reached between branch organisations of retail landlords and tenants in The Netherlands. The steunakkoord includes the following provisions:
- Rent suspension between 50–100% (depending on specific circumstances such as the size of the retailer) for three months (as of April 2020). This only applies to retailers with a turnover loss of at least 25% which is directly attributable to the COVID-19 crisis. Note that a suspension is only a delay to the payment obligation, and not a reduction in the amount payable;
- Retailers will make maximum efforts to re-open, as of a date to be determined;
- Transparency will be required on turnover loss;
- Possible reduction of rent after the 3-month period as soon as the impact of COVID-19 is clear, tailored to the retailer's specific circumstances; and
- The Dutch government and the signing banks (ABN Amro Bank N.V, Deutsche, ING Bank N.V and Rabobank) commit to do their utmost to guide customers through this crisis – as an example of this, large Dutch commercial banks have committed to delay repayment obligations for up to six months under loans to SMEs (which are financially sound) up to a maximum of EUR 2,500,000 in principal loan amount.
On 3 June 2020, the steunakkoord 2.0 was published, urging those landlords and tenants who have not done so already to start a dialogue in order to reach mutual agreement. The steunakkoord 2.0 also notes that in those concessionary agreements reached between landlords and tenants for the months of April and May 2020, 50% rent reduction was agreed; and for the month of June 2020, a 50% rent suspension was agreed, with the obligation to pay being delayed until June 2021.
These covenants apply for retail stores and are not binding, which means landlords and tenants are entitled to make differing agreements, based on their own commercial circumstances. We have observed that both the branch organisation of retail landlords and the branch organisation of retail tenants give their own interpretation to the steunakkoord. After the steunakkoord 2.0 was published on 3 June 2020, the branch organisation of retail tenants made a statement implying an agreement was reached on rent remission for the months of April and May. Following this statement, the branch organisation of retail landlords explicitly stated that the steunakkoord 2.0 is a non-binding guideline and landlords are in no way obliged to accept any rent remission. In conclusion, although the steunakkoord 2.0 gives indicative guidance concerning the content of the agreements being made, it appears that most parties agree to any COVID-19 related concessions on a case-by-case basis, and not on the basis of the steunakkoord 2.0.
It is evidently difficult for governments to introduce recommendations that will please all parties. In assessing the reaction to these codes of practice, it can be seen that whilst tenants would like to see a recommendation of more generous concessions, landlords are keen to emphasise that any code of practice is non-binding.
For landlord or tenants who own or occupy properties across multiple jurisdictions, some common principles can be identified:
- Transparency between the parties, with tenants giving their landlords open and clear information in relation to the impact that COVID-19 has had on turnover. This enables landlords to give a fair and proportionate response to any request for concessions.
- Whilst rental concessions may be recommended, tenants should endeavour to pay other lease costs (such as insurance rent and service charge), as these may be pressure points for landlords.
Our EMEA real estate team is well-placed to advise on a strategic approach to managing an international real estate portfolio during the easing of COVID-19 restrictions and beyond.
In our Global COVID-19 Real Estate Guide, Baker McKenzie lawyers from 39 jurisdictions address some common questions that landlords and tenants are considering in these unprecedented and uncertain times.
Our recent webinar on the impact of COVID-19 on EMEA retail real estate (in collaboration with Harper Dennis Hobbs) contains a detailed discussion of the impact of government stimulus and policy response in five European jurisdictions. A recording is available here.