The UK government has published its coronavirus COVID-19 action plan, which recognises the virus as a "significant challenge for the entire world." Although a lot is yet unknown about the virus, the World Health Organisation declared it a public health emergency of international concern. The situation is rapidly evolving and the UK government estimates that "in a stretching scenario, it is possible that up to one fifth of employees may be absent from work during peak weeks." Businesses must consider their position and the potential impact of coronavirus COVID-19.
In this article, we highlight some issues that may arise from a UK real estate perspective and provide some practical guidance. The situation is in flux, so it's important to keep up to date with advice published by the government and regulatory agencies, particularly if the virus itself mutates, a real concern expressed by the WHO from past experience of similar outbreaks.
This note is not intended to be all encompassing; nor does it constitute legal advice. Please get in touch with your usual DLA Piper contact if you require more specific advice, whether on real estate matters or any wider business issues.
Landlord and tenant considerations
Is a tenant required to occupy premises and can it be required to vacate if necessary?
Currently, the Health and Safety Executive (HSE) isn't issuing its own guidance on the issue, and is referring employers to advice from the Department of Health and Social Care and Public Health England (PHE) or, in Scotland, Health Protection Scotland (HPS). As at 3 March 2020, that advice is if an employee or member of the public with suspected coronavirus COVID-19 has recently been in the workplace, there is no need to close it (or send staff home). If a case is confirmed, the advice is not to close the workplace. There is, however, specific advice on self-isolation, cleaning and rubbish disposal, and further advice would be given by PHE or HPS at the relevant time, as would advice to those who had been in contact with the individual.
It is, of course, important to keep up to date, as the guidance may change, particularly if the virus mutates. If the guidance changes and buildings need to be vacated, the tenants of the building would be expected to follow guidance issued by the authorities.
Most standard commercial leases include an obligation on the tenant to comply with all statutes and notices or orders made by competent authorities. As a result, the tenant would be in breach of that covenant if they fail to comply with any clear directions issued by the HSE, the Department of Health and Social Care or PHE, such as the closing of offices or asking staff to work at home to contain the spread of coronavirus COVID-19. If government guidance changes and requires businesses affected by the virus to close, a tenant would likely be required to vacate as a result of this compliance-with-laws clause.
If a tenant is unable to occupy, what are the legal consequences?
Force majeure and the law of frustration: Leases generally don't contain force majeure clauses allowing parties to end the lease, unlike development agreements or construction contracts, which often do. Instead, if prevented from occupying their premises, tenants may look to the doctrine of frustration to see if that can help get them out of their lease obligations. However, frustration is a high bar: a contract will be frustrated if an event occurs that renders it impossible to perform an obligation or the obligation is radically different to that originally envisaged when the contract was made. There are no reported cases in England where a lease has been held to be frustrated. In the context of coronavirus COVID-19 in England, it therefore seems unlikely that a tenant could successfully argue that its lease has been frustrated, particularly if any period during which it is unable to occupy the premises is only temporary (which seems the likely scenario at the moment).
Withholding of rent: Most leases don't allow the tenant to withhold rent regardless of the circumstances.
Insurance: It's unlikely tenants will have business interruption insurance that will cover this scenario. Tenants may have procured business interruption policies, but this is usually linked to property damage. Non-damage business interruption cover (which might cover the impact of an epidemic) is available in the insurance market, but not commonly bought. In England, the government has confirmed its intention to declare coronavirus a "notifiable disease" and in Scotland and Northern Ireland, it has already been classified as such. This is a formal classification required by many insurance policies, so those who have business interruption cover may now be able to claim under it, depending on the specific terms of their policy.
Keep-open clauses in leases: Retail and other tenants with keep-open covenants in their leases will need to consider the impact of closing their outlet if it becomes necessary. Depending on the provisions of the lease and the government's official guidelines and rules at any given time, keep-open clauses have the potential to cause disputes between landlord and tenant.
As above, most UK commercial leases will contain an obligation on the tenant to comply with statute. The tenant would be in breach of covenant if it fails to comply with any clear health and safety direction issued by the government, such as the closing of premises. If, however, an occupier were forced to close its premises based on health and safety guidelines or emergency legislation, how would these measures be reconciled with a keep-open clause?
It is well established in England and Wales that only in the most exceptional cases will the courts enforce keep-open covenants by ordering specific performance. Though landlords are theoretically able to claim damages if a tenant breaches its keep-open covenant, it will be difficult for a landlord to substantiate its loss. It is particularly difficult if there are no turn-over rent provisions in the lease. For example, how do you value a drop in footfall?
The treatment of keep-open clauses in Scotland is different to that in England and Wales. The remedy available for a landlord is "specific implement." This is a court declarator obliging the tenant to re-open the premises and recommence trading.
We expect that a court would view the compliance-with-statute clause as taking precedence over the keep-open provisions in the lease. This may, however, give rise to a further dispute as to whether a landlord should expect to continue to receive rental income under the lease provisions as rent suspension clauses will normally apply only in the event of any material damage and destruction to the premises. It is likely that landlords will be able to enforce rental provisions: one could argue that the tenant's business could continue to trade online, or it could implement agile working policies. But it remains to be seen how courts would treat this should any tenant dispute the matter.
Health and safety: In almost all cases, it will be for the tenant to consider any threat to the health and safety of its employees, as health and safety law states that organisations must:
- assess risks to employees, customers, partners and any other people who could be affected by their activities;
- arrange for the effective planning, organisation, control, monitoring and review of preventive and protective measures;
- ensure they have access to competent health and safety advice; and
- consult employees about their risks at work and current preventive and protective measures.
Landlords who are employers will also have duties to their staff and others regarding risks posed from infectious diseases. Failure to comply with these requirements can have serious consequences – for both organisations and individuals.
Landlords may also have responsibilities to the extent that they exercise relevant control over parts of premises (and their ability to implement measures). Taking legionella as an example, the law imposes a duty on relevant persons to assess and address legionella risks at a property. Such a duty may rest with landlords, as legionella is a bacteria which can proliferate (such that it can pose a risk of causing ill-health) in the water systems of a building, and addressing water quality and contributory risk factors is usually something that the landlord (as opposed to a tenant) can control. This is different to the situation with coronavirus COVID-19, as it appears that it's not the construction of the building or management of the infrastructure that has an effect on the spreading of the virus. Rather, it is passed human to human, and isn't linked to buildings or their infrastructure – at least in its current mutation.
In terms of specific health and safety regulations, a landlord has no explicit obligations at law regarding the prevention or containment of coronavirus COVID-19 in its premises. The virus is, however, a biological agent, so the Control of Substances Hazardous to Health Regulations 2002 (COSHH) may be relevant, as they provide a framework to control the risks from a range of hazardous substances. Whether such obligations towards tenants exist under COSHH largely depends on the level of control a landlord has over the property, which will itself be determined both by the terms of the leases granted and the physical characteristics of the property.
For example, if a landlord has granted a long lease of the whole of a building and has no ongoing maintenance or services obligations towards its tenant, then the landlord is unlikely to have any responsibility under the regulations. If, however, a landlord has granted a lease of just one floor in a multi-let office block, with shared air conditioning and other common services and areas, and it retains responsibility for maintaining and providing them, its obligations may be more extensive.
If a landlord does have obligations under COSHH or other health and safety legislation regarding the premises it lets, it should assess the risks of coronavirus COVID-19 and may need to take preventative measures (e.g. more frequent cleaning of lavatories, eating areas, door handles and hand rails). In a confirmed case of coronavirus COVID-19, however, measures will primarily be dictated by PHE or HPS, and following these will be the best way to comply with health and safety obligations. Indeed, regardless of the diagnosis of a case of coronavirus COVID-19, guidance from PHE, HPS or the government should be followed in relation to cleaning and so on (to the extent that this is the landlord's responsibility under contractual provisions). Care should be taken to ensure that, for example, suitable handwashing facilities are available if these are part of the landlord's responsibilities under the lease. Landlords must also ensure that they keep up to date with PHE and government advice.
Occupier's liability: Provided a landlord in control of all or any part of the premises takes all reasonable steps to protect the safety of those invited and uninvited entering the building or premises (and can evidence that reasonable steps have been taken), it is unlikely that any additional liabilities will result from this legislation. Reasonable steps in this context would be complying with advice given by PHE or HPS as it changes from time to time.
Landlord's ability to recover costs of enhanced cleaning and regulatory compliance
Though there is currently no explicit legal obligation on commercial landlords to provide extra cleaning services to prevent coronavirus COVID-19 spreading in their premises, many are taking pragmatic steps. In particular, commercial landlords responsible for common parts are providing more frequent and thorough cleansing of those common parts, particularly frequently touched surfaces (e.g. door handles, elevator buttons and toilets). Supplying these extra cleaning services will have cost implications, and commercial landlords should check the service-charge provisions in their leases to ensure such charges are recoverable.
Most service-charge provisions contain a sweep-up provision allowing the landlord to recover reasonable costs incurred in line with the principles of good estate management. Some service-charge provisions will also allow costs incurred as a result of complying with "applicable laws" to be recovered – although whether a landlord can rely on this type of provision will depend on whether the government imposes prescriptive measures. In each case, the recoverability of a landlord's costs for such enhanced cleaning measures would be subject to any tenant-negotiated service-charge cap or specific exclusions in the list of services contained in the lease.
Arguments may arise as to whether the landlord is required to provide certain services (whether by contract or by law) and, where the landlord has discretion to carry out services, whether that discretion is exercised in accordance with the contractual provisions.
Further arguments could arise on the interpretation of what constitute reasonable costs. For example, if coronavirus COVID-19 becomes more widespread, would providing a hand sanitiser to every occupier that comes onto the premises be a cost that is recoverable as service charge or otherwise?
Wider regulatory issues regarding any steps taken (such as cleaning or surface disinfection) by a commercial landlord or its managing agents should also be considered. For example, a planning permission for commercial premises will often contain conditions that restrict or limit the hours during which servicing may take place. This could possibly catch enhanced or additional cleaning activities, for example, if additional rubbish clearance is required or additional traffic and noise is caused.
Planning authorities have power to take enforcement action if activities are carried out in breach of a planning condition, and often will if disturbance is caused to neighbouring occupiers. Those responsible for building or premises management should, therefore, check for restrictions on servicing or access arrangements and ensure that, wherever possible, enhanced measures are carried out in compliance with them. This may mean scheduling work at specific times, and could require more detailed collaboration with tenants and occupiers.
The applicability of force majeure clauses in construction contracts
Coronavirus COVID-19 is already affecting engineering, fabrication and procurement contracts that contemplate inputs of labour, services and goods from affected regions.
Many international and domestic construction contracts contain force majeure clauses to give relief in these circumstances. The purpose of a force majeure clause is to avoid the legal and commercial uncertainty of events that would otherwise frustrate the performance of the contract and that were not contemplated when the parties entered into the contract.
It's possible that if you have such a clause in a contract it will cover the current coronavirus COVID-19 situation. Contracts vary, however, and the operation of the force majeure clause may differ in each case; specific legal advice should be sought.
Under the JCT form of contract, force majeure is a "relevant event" entitling the contractor to claim additional time for completion of the works, but it isn't a "relevant matter" that would allow the contractor to claim loss and expense. Force majeure isn't defined in the JCT contract, but the current coronavirus COVID-19 situation is likely to be considered such an event. If the government introduces any emergency powers, for example to shut down entire cities, this may also be a relevant event.
The NEC contract provides that an event that stops the contractor from completing the works may be a compensation event entitling the contractor to additional time and money. Such an event must be one that neither party could prevent, and that the contractor would have judged at the start of the contract to have such a small chance of occurring that it would have been unreasonable to have allowed for it. This would cover any events – whether disruptions to supply chains and labour resources, or government action – that prevent the contractor from completing the works. This provision can be relied on by contractors who entered into contracts before the outbreak of the virus, but possibly not for contracts entered into after the outbreak, as arguably it is something the contractor should have allowed for.
What about contracts negotiated now? Force majeure type provisions may not be of assistance in contracts being agreed at the moment, depending on how the provisions are drafted, because the existence of coronavirus COVID-19 is known. A better approach is to agree specific drafting to provide relief from the effects of coronavirus COVID-19, whether this is disruption to supply chains and labour resources, or the result of the government introducing any emergency powers. The exact requirements may depend on the precise nature and location of the project, and will require careful consideration.
For businesses likely to be affected by coronavirus COVID-19, practical steps could include:
- keeping up to date with the latest guidelines issued by the WHO and UK government;
- reviewing any obligations in leases, construction contracts and other land instruments in light of coronavirus COVID-19;
- inserting epidemic wording into any new contracts of land;
- providing enhanced cleaning measures to frequently touched surfaces;
- where remote or homeworking for employees is possible, arranging for laptops to be taken home on a pre-emptive basis; and
- preparing IT systems for potential additional remote-access usage and capacity enhancement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.