Covid-19 Property Bite-Sized

As our recent blogs have highlighted, the interests of occupiers, landlords and funders have all suffered during this turbulent time. Rules, regulations and usual practices are continuously changing so here is a bite-sized property-related summary:

Rental Liability

While landlords are not legally obliged to grant concessions, the Covid-19 crisis has seen a seismic shift in the number of tenants asking for:

• reduced rent;
• deferred rent;
• rent holidays;
• a switch from quarterly to monthly payment;
• a switch from payment in advance to payment in arrears;
• a switch to a turnover-only rent; or
• a drawdown from an existing deposit rather than immediate payment of sums due.

In the interests of business stability, it has been encouraging to see landlords and tenants working together during this crisis. Intu is supporting occupiers with an 11% reduction in its service charge budget for the year; British Land, TfL, Gentian and Network Rail have delayed or cancelled rents which were due on the March quarter date.

Landlord’s Position

s82(1) Coronavirus Act 2020 provides for protection against forfeiture of leases, by whatever method, for commercial tenants who are in default with payments of rent or other sums due under their leases. The right to forfeit is suspended during the initial period of the Bill’s application up to 30 June 2020 and any extension of it. Interest will continue to accrue on unpaid items during the period.

Other landlord’s remedies are unaffected, theoretically. The landlord could use Commercial Rent Arrears Recovery (CRAR) against any tenant’s goods at the property. In practice, however, the Civil Enforcement Association reports that enforcement of debts is suspended for the time being and civil enforcement agents are necessarily putting CRAR on hold too.

Where there are guarantors on the lease, then recourse against them may be a useful option for landlords; however, the guarantors may seek to recover from the tenant pursuant to an implied common law indemnity.

Force Majeure

Although commonplace in other jurisdictions and certainly within construction contracts, it is generally quite rare for leases in England and Wales to contain force majeure clauses which might allow the parties (in given circumstances) to abstain from performance of obligations or to bring the lease to an end. In England and Wales, the certainty offered by the traditional FRI lease producing a clear rental flow for the landlord has underpinned the real estate investment and lending market, regardless of whether such terms might, objectively be seen as unduly harsh on the tenant or commercially fair. Many practitioners (particularly those acting for commercial tenants) are now considering the merits of introducing a contractual right to assert force majeure in order to enable a tenant to abstain from performance or to bring a lease to an end, in light of this crisis.

Frustration

Covid-19 is not very convincing as a frustration event since it does not render the enjoyment of possession of the property impossible. Temporary closure of premises by government order, even quite a lengthy one, is also unlikely to be regarded as making a sufficient alteration to the circumstances as to amount to frustration.

Permitted Use

Commercial leases are often carefully and explicitly worded as to what the property may be used for and what is prohibited. The current Covid-19 crisis has seen the government legislate to relax strict planning requirements and to introduce extensions to “permitted development” to allow pubs and restaurants to bypass planning applications to allow for change of use and to permit sales on a take away basis.

Insurance

Tenants may well have business interruption cover but the insured risks covered are generally linked to property damage such as fire, flood, impact or explosion etc. Insurer provider, AXA, has published a bulletin stating that most insurances will not cover a virus unless expressly mentioned in the policy.

Conclusion

Turbulent, unprecedented and changing times; “business as usual” will probably not apply for some time so it is vital for both parties to work together to protect long-term investments and business sustainability.

If you have any questions about this topic, please do not hesitate to contact Joanne McIvor or any member of our Property team.

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