We have put together a number of frequently asked questions relating to the impact of COVID-19 on real estate.
1. The tenant has missed their rent payment
i. Can a landlord forfeit the lease?
No - the Coronavirus Act 2020 has been passed by Parliament and is awaiting Royal Assent. It prohibits a landlord from forfeiting a business tenancy for non-payment of rent (Section 82). This prohibition will remain in place until 30 June 2020 (subject to extensions).
Landlords should note that 'rent' is widely defined; "Rent" includes any sum a tenant is liable to pay under a relevant business tenancy. This definition seems to be extraordinarily wide as it would also include service charge, insurance rent, interest and any sums that are required to be paid under, say, a Jervis v Harris clause (where a landlord serves a notice on the tenant requiring them to carry out works, if the tenant refuses the landlord has the right to carry out the works themselves and charge the tenant for those works as a debt).
ii. Can a landlord take other action to recover arrears?
In theory, yes - the Coronavirus Act does not prevent a landlord taking other steps to enforce their security. Therefore the normal options are available including:
- drawing on the rent deposit (subject to the terms of the deposit);
- Commercial Rent Arrears Recovery;
- Guarantors and former tenants under Authorised Guarantee Agreements (AGAs);
- issuing a statutory demand; and
- a money claim.
We recommend that landlords work with tenants to establish a pragmatic payment plan in these exceptional circumstances as set out in our insight - COVID-19: Landlords and Occupiers Should Work Together.
iii. Will a landlord compromise its position by negotiating a lower rent or suspending rent with my tenant?
Not necessarily - in accordance with the Coronavirus Act, no conduct by or on behalf of the landlord, other than giving an express waiver in writing, is to be regarded as waiving a right of re-entry or forfeiture for non-payment of rent.
Thus the landlord's right to forfeit is protected if they enter into any negotiations with the tenant in order to agree rent concessions, or other means of staggering or reducing payment of rent, as long as they do not expressly agree to waive the right to forfeit.
2. If a landlord closes a shopping centre; is that derogation from grant?
Derogation from grant will always depend on what has been granted in the lease. However, in a typical scenario, where the Landlord has granted the right to the tenant to use the shopping centre and/or has covenanted to keep the centre open during trading hours, then it is likely to be a derogation from grant to close the shopping centre.
The Landlord may argue that as the shops have to close, they are simply taking pragmatic steps which will reduce the service charge cost for all tenants and also provide additional security for the non-trading units. To the extent that all of the shops within the centre are required to close pursuant to the recent announcement, then practically, it is difficult to see any of the tenants objecting to the closure of the centre.
However, typically, shopping centres also contain a supermarket offering and/or pharmacy offerings. If the centre is closed such that the supermarkets and/or pharmacy cannot open, then they will almost certainly have a claim for derogation from grant. As it stands, shopping centres themselves are not required to close, only the shops within them that sell non-essential items.
A tenant may seek an injunction requiring the shopping centre to open, or damages.
Supermarkets and Pharmacies
If supermarkets or pharmacies are located in shopping centres, they could bring an action for an injunction requiring the Landlord to keep open the shopping centre. We doubt that a Court would in fact grant an injunction requiring the shopping centres to stay open to allow essential shopping at these retailers. Whilst the government has stressed the importance of allowing people to get access to essential food and medical items, the general rule is that the Court will not grant an order (such as a requirement to keep open a shopping centre) which will require constant monitoring.
We believe that damages would be available to the supermarkets and pharmacies most likely representing the loss of profits that the supermarkets/pharmacies would suffer as a result of the closure of the shopping centre. It may be that offering a rental holiday for the period of closure may reduce the chances of a claim for damages and would in any event reduce the quantum of any such claim.
Aside from the strict legal position, there may well be bad publicity if the closure of shopping centres is reducing the ability of members of the public to access essential food and medicine. It may well be sensible to hold meetings of tenants in order to get a sense of the level of objections to a closure of the shopping centre.
Whilst other retailers may have a claim for derogation from grant, we do not believe that the Court would order an injunction requiring the shopping centre to stay open and further that it is difficult to see what damages could be claimed in circumstances where the shops themselves are required to close.
3. What if the tenant chooses to close?
Most commonly in retail leases, tenants who have contractually agreed to keep trading may be concerned about lack of staff availability or stock. Trading obligations in leases are generally enforceable but the remedy is likely to be limited to damages. A court order compelling the tenant to trade is very unlikely. A landlord may be able to forfeit the lease (assuming the lease allows for this) although a notice will have to be served on the tenant first requiring the tenant to remedy the breach (i.e. open for trade).
Well-drafted keep open provisions usually allow closure at certain times - for example during works, before an assignment, following insured damage or if opening would result in a breach of another provision of the lease. A tenant ceasing to trade because it has no stock to sell or because of staff shortages is likely to be in breach of its obligation. If the tenant is bound to comply with laws which relate to COVID-19 (e.g. the government has ordered a lockdown) - our view is that the statutory compliance trumps the keep open obligation - even if this wasn't expressly set out in the keep open clause.
If a landlord considers taking action against a tenant in these circumstances it will need to weigh up whether it will contribute towards the likelihood of the tenant's insolvency leaving it with a void which may be difficult to fill. A landlord would also be running the risk of adverse publicity.
Although many landlords would not consider enforcing under the circumstances, some might be concerned about superior lease or banking covenants to enforce occupational tenant obligations. This will depend on the nature of those obligations - but if in doubt take advice and possibly seek a dialogue with your superior landlord or lender about those obligations. Enforcement may not be in in anyone's commercial interests as things currently stand.
4. A break notice has been served, which requires vacant possession. Is that enforceable in the current environment?
It is likely that vacant possession will still have to be given, notwithstanding the restrictions around COVID-19. This is because the exercise of a break is a privilege in a lease and will still require strict compliance with the pre-conditions to the break. The tenant will bear the risk of non-compliance.
5. How about insurance for loss of rent etc.?
Both landlords and tenants should check the terms of their insurance policy to confirm whether losses (for example, loss of rent to landlords) and/or extra expenses are covered, particularly if a premises is required to close under the government-mandated lockdown.
Generally speaking insurance policies are wide enough to cover COVID-19. However, in order for the insurance to pay out on rent, they must trigger the rent cessor provisions in the lease. These are normally only triggered due to destruction or damage to premises. COVID-19 is not destruction of premises, but there are suggestions that it may amount to "damage" to premises; this argument is unlikely to be successful. In addition, many businesses have sought to claim under a standard 'business interruption' clause. However the Association of British Insurers has warned that COVID-19 is unlikely to trigger this provision.
6. Must a landlord continue with the other obligations under the lease, such as property management?
In terms of managing buildings, property managers should monitor government guidance and respond appropriately. We set out below the key concerns:
- Providing communal services - A landlord may have to provide enhanced cleaning services, particularly if the lease is caught by the Control of Substances Hazardous to Health Regulations 2002 (COSHH).
- In terms of cleaning in particular, occupiers who think a landlord is not undertaking appropriate cleaning services will need to look at the terms of their leases to see the level of cleaning required. Claims from occupiers who test positive for COVID-19 that a landlord did not provide sufficient cleaning are unlikely. The burden would be on the occupier to prove that the cleaning was not sufficient and that they acquired the virus as a result. Meeting that requirement would be almost impossible in practice.
- Can a landlord recharge for services required in response to COVID-19? The lease wording should be considered carefully, as it will dictate how and when the landlord can pass on costs to the tenant under the service charge. Often there is a reasonableness requirement, and frequently a broad discretion for the landlord to take action pursuant to good estate management or as required by statute. In these circumstances, it is likely that extra cleaning, security or measures to ensure appropriate distancing and hygiene can be passed through the service charge.
7. What about the logistics of property management?
Staff absence and remote working will affect asset and property management activity, and the following in particular may prove challenging:
- If any notices must be served, how is that going to happen and when? It would be prudent to plan additional time to comply with formal requirements or engage early with other parties to agree different processes. For example, if there are strict timings on the service of break notices, these must be complied with if they are to be effective. It will not be possible to argue later that a break notice can be served late because offices were closed. Where there is going to be any doubt about effective service because premises are empty or postal services are disrupted, early advice should be sought.
- Vacant possession - Obligations to give vacant possession before expiry could be a challenge if staff/movers are unavailable. If a landlord doesn't have a tenant lined up to take the premises straight away, they may agree between them that the tenant will have more time to comply with this obligation.
- Getting documents signed may be trickier. In terms of day to day asset management it may be possible to electronically sign documents - if someone is self-isolating but well enough to work from home they can use dedicated e-signing platforms or scanned signatures to approve and execute documents like licences, contracts, side letters, rent review memorandums and many short term leases. Market acceptance of the validity of these types of signatures is increasing and current events could be the stimulus for even wider adoption. Witnessing signatures will be a challenge. A witness to an e-signature needs to be physically present and this may be difficult.
- Signing documents - The Land Registry currently requires wet ink signatures on documents that require registration (including transfers of land and leases over 7 years). It may be necessary to appoint someone who is available to sign the documents and follow the processes for document execution if signatories are working remotely. There are other workarounds that may be appropriate for specific transactions such as delaying completion of the registrable lease or transfer but granting occupational rights in the meantime.
- Completing documents -Many organisations are considering appointing the property managers or lawyers who produce the documents as attorneys to sign them. Where this is the case, both attorney and principal will want to agree the parameters and authorisation process for signing.
8. What if contracts are delayed?
Time periods are fundamental to most real estate contracts. The consequences of delay will depend on the individual contracts. Considerations include:
- Lease completions - contracts usually expressly provide for what happens in the event of one party not being able to complete on the specified day. Often this is compensation rather than automatic termination.
- Works obligations - obligations to complete works in a certain period in agreements, licences and otherwise will usually provide for delay beyond the control of the parties. This could be for specified reasons or by a general reference to "force majeure". The terms of contracts would need to be reviewed in the context of the particular delay (i.e. lack of materials, personnel - and whether that is due to illness or Government regulation of activity). If the delay provisions are not engaged, then the party with the obligation will have to proceed even if the cost of personnel and materials has increased.
- You can read more analysis in relation to building contracts and development agreements in our article - COVID-19: minimising the contractual risks in UK construction.
- Payments - contracts are usually clear about the consequences of late payment. Interest is payable at a specified rate (sometimes after a grace period). Some might waive interest due to delay because people were not in the right place to action payments but in practice we expect the approach to most regular payment activity (for example rent payments) to be unaffected as tenants have sufficient time to plan and automate payments if necessary.
9. Is it possible that a lease could be frustrated because of COVID-19?
Frustration occurs when unexpected circumstances make it physically or commercially impossible to fulfil the contract, or fundamentally transforms the obligations into something different. There is no one size fits all answer to whether frustration applies to real estate contracts. It depends on various factors including the terms of the contract and the nature of the event. The impact of COVID-19 on each contract will be different.
Although leases can be frustrated, it is extremely unlikely in the light of recent case law.
10. What happens to business rates?
Many commercial tenants have been granted a business rates' holiday for this coming financial year. The tenants that will not have to pay are:
- Retail units including opticians and petrol stations and dry cleaners
- Cafes, restaurants, drinking venues and bingo halls
- Hotels, cinemas, gyms
- Letting agents, estate agents
This list has continued to expand so up-to-date guidance should always be sought. The local authority should make direct contact to take advantage of the rates' relief. Service providers (for example, dentists, betting shops, casinos) will not receive relief.
11. Are winding up petitions for insolvent companies still going ahead?
Not in practical terms, but there remain benefits to serving a petition. The Coronavirus Act does not prohibit winding up petitions in order to place insolvent companies into liquidation. Petitions are currently being adjourned by the courts, so they are not being heard and instead postponed until a later date (to be decided), While winding up petitions are being adjourned there would be nothing in principle to prevent a winding up petition being presented.
Significantly, issuing a petition creates significant obligations and restrictions on a company's ability to trade. These restrictions apply before the petition is heard. Therefore there are benefits to issuing a petition even if the hearing itself will not go ahead for the foreseeable future. Much will depend on the other options open to the creditor and the commercial prospects.
12. Are the courts still open for business?
Yes, although with restrictions in place to comply with government guidance relating to spread of COVID-19. Courts' guidance is being revisited very frequently. At present whilst claims continue to be issued, hearings are being postponed where possible or moved to telephone hearings where possible. There is likely to be a delay in the issue and progression of claims.
Read the original article on GowlingWLG.com