Real Estate Update: Code of Conduct Published for Commercial Tenancies in Ireland Impacted by COVID-19

The Department of Business, Enterprise and Innovation recently published a Code of Conduct to be observed by both landlords and tenants. The Code outlines the approach that Government hopes landlords and tenants will adopt as ‘best practice’ in order to reach amicable agreements in light of economic shocks caused by COVID-19.

The Code has no statutory basis and does not alter the legal relationship between parties to a commercial relationship, which is the lease.

Purpose

Recognising the difficulties faced by businesses in Ireland in 2020, the Government committed to publishing a Code of Conduct for commercial tenancies in its Programme for Government.

The Code is drafted on the basis that landlords and tenants have a shared common interest in working together to enable otherwise viable businesses to survive the economic hardship and to facilitate the resumption of normal trading activities through the period of recovery.

It is acknowledged in the Code that commercial leases are primarily a matter for the parties involved and all parties are obliged to meet existing obligations unless renegotiation between the parties takes place and an agreement is reached.

The Code further notes that tenants who are in a position to discharge their obligations in full should continue to do so. Landlords, on the other hand, are encouraged to share any benefit derived from loan payment breaks or government relief with their tenants.

The Department of Business, Enterprise and Innovation has stated that they will keep the Code under review and will determine if the Code needs to be replaced or extended. The Code will remain in place until 31 July 2021.

Negotiation

The Code does not set out a standard procedure by which landlords and tenants should engage in the event that a renegotiation of commercial terms to a lease is sought. However, the Code does outline that all parties should act in good faith, reasonably and flexibly.

Tenants seeking concessions should clearly outline to landlords why such concessions are necessary. Evidence in the form of financial information should be provided relating to the tenant’s business and the specific business unit to which the lease relates.

The Code encourages landlords to provide concessions where they reasonably can, and refusals should clearly outline a reasonable explanation of the landlord’s decision taking into account information provided by the tenant.

Suggestions

The Code suggests a number options that might be considered:

• A full or partial rent-free period for a set number of payment periods

• A deferral of the whole or part of the rent for one or more payment periods

• An extension of the period of the term under the lease

• A reduction in rent or a transition to turnover rent

• An agreement to split the cost of rent for any unoccupied period between the landlord and tenant, or

• A waiver of any contractual interest on outstanding rent arrears by the landlord

Service charge

A service charge and an insurance charge under a lease are not profit-making and will generally need to be paid in full notwithstanding the current difficult market conditions. Nonetheless, the Code recommends that:

• Service charges should be reduced where a lack of use of the property has lowered the service charge or other costs incurred

• Landlords ensure that service charge costs are reduced where practicable

• The frequency of tenant service charge payments should be spread out over shorter periods where possible

• Where service charges are reduced, this reduction should be passed on to tenants as soon as possible to assist with tenant cash flow and viability

• Landlords ensure that management fees reflect the actual work carried out, and

• Any reduction in statutory charges, such as local authority rates, or insurance is passed on to the tenant appropriately apportioned

Conclusion

The Code in many respects reflects the reality of what many landlords and tenants have been doing over the last several months. It remains to be seen, however, how long that shared interest can continue the longer the current circumstances continue. Whilst non-binding and voluntary, parties who depart from it should be mindful of how the Courts will apply the Code in due course.

For more information on the continuing impact of COVID-19 on your business, contact a member of our Real Estate team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.