Keep calm and carry on (through coronavirus)19 Mar 2020 // Insights
Real Estate Dispute Resolution Partner Lara Nyman discusses the impact of COVID-19 on the real estate sector.
The impact of COVID-19 is changing drastically by the day, if not the hour. Just this week, the UK Government has announced a £330 billion fiscal package to provide relief for business, and on 18 March 2020, the government promised emergency legislation to suspend new evictions from social or residential accommodation. There are also proposals in place for business rates and mortgage relief during this unprecedented period.
Understandably, the uncertainty and ambiguity caused by the challenges of COVID-19 is causing concern for landlords and tenants alike who will be keen to understand what their legal rights are, and what remedies may be available to them in the current climate.
One factor which seems key, whether you are a landlord or a tenant, is the element of control and collaboration in adopting a proactive response to an international crisis. Whilst it seems a long way off, history teaches us that when the crisis subsumes, normality will resume. Whatever form of “normal” that may take, landlords will want to retain tenants and, equally, while the landscape may change with technological developments and change in business practice, there will still be tenants who require premises and those that need accommodation. Because of this, thought needs to be given to the long-term as well as the immediate future, to ensure continuity of income stream.
The message seems to be that careful consideration needs to be given to the contractual arrangements before embarking on a course of action, least a party finds itself on the receiving end of a claim. There are a number of practical steps which can be taken by both parties to preserve continuity, and remain proactive.
Consideration must also be given to contractual arrangements between landlords and tenants in the context of how COVID-19 may impact current terms and obligations, or what additional terms may be required if lease negotiations are pending. Of course, the starting point is the specific terms of any lease or tenancy agreement. These need to be closely considered, as well as the responsibilities of each party, the nature of the tenancy, its location, and who is in occupation as well as the covenants given by each party.
Several questions should be asked; how does COVID-19 affect a landlord’s covenant for quiet enjoyment or the obligation to comply with legislation? Will COVID-19 impact a landlord’s covenant to provide services in relation to common parts, or indeed residential landlords obligations under the Homes (Fitness for Human Habitation) Act 2018 and other statutory provisions? What is the impact of COVID-19 on the duties of care owed by parties in respect to the occupiers of premises and their obligations, at common law, or indeed under statute? Will landlords be expected to owe a greater duty of care to its occupiers particularly the vulnerable and high risk categories?
Many leases will contain a rent cesser clause, and the question will undoubtedly arise as to whether COVID-19 will entitle a tenant who is unable to occupy a property to withhold rent. Such clauses need to be examined carefully together with the terms of any insurance policy. If lease negotiations are on-going, consideration will need to be given as to whether the insurance provisions in a lease are wide enough to cover a future pandemic. Similarly, with service charge provisions, is a landlord able to pass on the costs associated with COVID-19 or withhold services? Again, does the drafting of any such clauses need amending?
With all the uncertainty at the moment, landlords are undoubtedly going to see an increase in requests by tenants for assistance with tenants’ contractual obligations, and possibly requests for the suspension or a variation of rental obligations, including a moratorium, pending the worst of the crisis. Landlords may well see an increase in the number of tenants exercising break clauses, or argue that the lease has been frustrated. Similarly, consideration needs to be given to ‘force majeure’ clauses, rarely seen in modern commercial leases, in constructions and development contracts and the implications on a landlord’s fit out works, or a tenant’s obligation under a licence to alter, should be considered as well.
We are already seeing a number of businesses, such as Selfridges, closing stores, with others, like Laura Ashley, filing for administration. Additionally, the leisure and service industry is effectively shutting down. It should also be taken into account that some tenants may be forced to close due to significant reduction of sales, and where tenants are forced to close, it should be determined whether they are in breach of a ‘keep open’ covenant or the impact on any rent determined by reference to turnover.
In terms of practical steps, the overriding message seems to be one of communication, assessing risk, and keeping up to date with the ever-changing situation. The Government has introduced measures to assist both landlords and tenants and these should be explored as well.
At Seddons, we can guide you through these extraordinary and unprecedented times by providing practical and pro-active advice. Should you have any questions, or need advice, please get in contact with the Real Estate Dispute Resolution team on 0207 725 8000.
What to read next
Head of Employment Helen Crossland outlines what employers can do if they suspect staff of having a problem with alcohol or illegal drugs.
Family Partner Neil Russell comments in eprivateclient on the introduction of a mediation voucher scheme by the MoJ.
Family Partner Victoria Sterritt commented in The Legal Diary on the recently released Family Court Statistics Quarterly: October to December 2020.