Coronavirus creating uncertainty for landlords
13 March 2020
Covid-19 (or the coronavirus as it is more commonly known) has now been labelled a pandemic by the World Health Organisation.
The disruption to normal life is escalating, with the cancellation of live events and Italy’s lockdown grabbing headlines. The risk level in the UK has now been raised from moderate to high and the situation is rapidly evolving. We are facing the possible prospect of school closures, restrictions on commuting, working from home and other ‘social distancing’ strategies, and with all that, a significant impact on the business world.
But what impact is it having on the real estate sector and what challenges are commercial landlords, in particular, coming up against? In this article, we provide a general overview of some of the issues and some comments on what can be done to help counter these.
What guidance is currently available to landlords?
At the time of writing, there is no specific guidance to landlords as to what actions must or should be taken in relation to properties which are occupied by tenants or used by members of the public. The starting point therefore has to be the general guidance provided by the Department of Health and Social Care and Public Health England.
There are several factors which will determine what steps (if any) landlords could or should take. These include:
- The type of property, its location and its use
- The role the landlord plays in relation to the property
- Who occupies the property (e.g. the type of tenant) and who has access to it
- Whether the property is being developed/re-developed and who is carrying out works
- The nature and terms of any agreement for lease, lease or other contractual agreements which have been entered into or are about to be entered into
- The risk that the landlord is facing. Is it contending with generic prevention (in accordance with general government guidance), does it need to limit exposure or has a case of the virus been identified at its property? If the latter, requisite next steps would, of course, be dictated by the authorities who should be contacted immediately
Control is key
What level of control a landlord has over its property is one of the key questions which should be considered at the outset. The potential responsibilities of a landlord of a single let property will differ significantly from those of a landlord of a multi let property, particularly one which plays an active role in the building’s management. A landlord may be contractually obliged to provide services (such as cleaning and maintenance) in relation to common areas used by its tenant and/or members of the public. It may act as an employer (e.g. to cleaners and security staff) and have obligations to its employees (please see our FAQs for employers containing guidance on the main questions we are being asked in respect of the coronavirus). Alternatively, the landlord may have appointed managing agents who manage the property on its behalf.
The capacity of the landlord and the level of control it has in respect of the building will impact signficantly on the extent and nature of its legal and social responsibilities.
Contractual obligations and insurance
The relationship between a landlord and an occupier is largely determined by the legal documentation that has been entered into between them. Careful consideration will need to be given as to how the virus may impact on existing terms or, where agreements are currently being negotiated, as to whether any bespoke provisions need to be incorporated into agreements to protect landlords against the risk.
As with Brexit, businesses may be reluctant to enter into new contractual commitments during such a period of uncertainty.
Whilst it will depend on the particular facts, common provisions which may be relevant include:
- Leases and ancillary documents:
- Quiet enjoyment – could any steps which a landlord may wish, or be obliged, to take in response to the virus (e.g. preventing or limiting access) be a breach of the landlord covenant for quiet enjoyment or a derogation from grant?
- Compliance with laws – any new coronavirus legislation which may be passed by the government could trigger either the tenant’s covenant to comply with laws which affect a property or the landlord’s covenant to provide services (which often contain a requirement to comply with laws in relation to any common areas or retained parts), or perhaps both. In each case, what impact would that have?
- Rent suspension – would a tenant who cannot occupy its premises for a period of time due to the virus still be required to pay rent? Many commercial leases provide for rent to be suspended if a property is damaged or destroyed by, or made inaccessible as a result of, an insured risk. Whilst unlikely to extend to a tenant’s inability to occupy due to the virus, the wording of each clause and of the insurance policy should be carefully checked. Landlords could find tenants attempting to withhold rent in breach of their leases.
- Service charge – if a landlord must incur additional costs in connection with the virus, can it pass those costs onto its tenants via the service charge? A well drafted service charge provision should be wide enough to cover this but could be subject to any caps and/or exclusions in place. Service charge provisions should be reviewed. In addition, does the lease allow the landlord to suspend the provision of services as a result of matters beyond its control? If so, what impact will this have on a tenant’s business?
- Break clauses – what if there is an upcoming break option? Could all this uncertainty and the risk it poses to a tenant result in a tenant deciding to exercise its break? What if a break condition (e.g. a requirement to provide vacant possession) cannot be complied with due to (ongoing containment related) restrictions imposed on the property? Could a landlord argue that the break has not been validly exercised?
- Retail leases – if a tenant’s rent is linked to turnover, what will be the impact on the landlord’s rental income if the tenant is forced to close or suffers a reduction in sales due to a significant decline in footfall? Furthermore, if a tenant chooses to close its premises, it could find itself in breach of any ‘keep open’ covenant contained in its lease. But what if it is legally obliged to close? You could have a scenario whereby performance by the tenant of the obligation in its lease to comply with legislation puts it in breach of its ‘keep open’ covenant.
- Side agreements – what if a landlord has agreed terms with a tenant which are documented in a side agreement? Could the terms of that side agreement be affected by any steps taken in connection with the outbreak?
- Construction and development agreements – what impact will there be on a developer’s ability to complete the project in accordance with its contractual commitments? Or a tenant’s ability to fit out its unit? In either case, such issues may result from containment related access restrictions or possible supply chain issues. Can a developer or landlord rely on a force majeure clause in the contract or could the common law doctrine of frustration come into play? Careful analysis would be required. For more information on these topics of force majeure and frustration, please see our article Counting the cost of the Coronavirus.
- Planning restrictions – could any steps taken to help contain or control the virus result in the breach of a planning condition. For example, additional traffic may be needed at restricted or prohibited times to help with stock management in supermarkets resulting in additional noise. Any restrictions relating to management, servicing or accessing a property may need to be reviewed and contingency measures put in place.
- Insurance terms – all existing insurance policies should be reviewed carefully. Whether any loss is covered will depend on the type of policy and the extent of cover. Traditional business interruption policies may not cover loss arising from the virus as these generally require damage to, or loss of, insured property and this may be difficult to difficult to establish. There are other policies on the market (e.g. policies covering loss caused by a notifiable infectious disease) which may help, however, it will depend on whether a landlord has taken out such a policy and the scope of its terms (including any exclusions).
What practical steps can and/or should a landlord take?
It is clear that landlords need to think very carefully about what steps they should or should not take and should seek appropriate advice. A landlord who wrongfully prevents or restricts an occupier or its customers accessing a property may well find itself open to a legal claim and/or an aggrieved occupier.
Despite the levels of panic which seem to be (rightly or wrongly) setting in, we are finding that most landlords are generally taking a more common sense and cautious approach, with some being more proactive than others.
The steps which could or should be taken, in varying degrees, include:
- Keeping up to date – monitoring the situation on a day to day basis, keeping up with the latest guidelines issued by the authorities and sharing the same with tenants and employees
- Communication – communicating with occupiers to see what steps are being taken to help protect against the risk and highlighting the importance of cleanliness and hygiene
- Assessing the risk – conducting risk assessments, considering factors specific to the property, such as its physical characteristics (would it be possible to isolate areas if necessary), its use and its occupiers
- Training and education – providing appropriate training and education to employees
- Enhanced security – establishing more stringent security (e.g. building entry) procedures for occupiers, employees and visitors and considering ways to reduce social contact
- Remote working – recommending to occupiers that their employees work from home if possible
- Enhanced cleaning – following guidance in terms of cleaning communal areas and managing waste disposal, as well as more frequent cleaning of those areas which are at high risk of spreading the virus (door handles, taps, lifts, stair rails)
- Supply chain – considering any possible impact on disruption to any supply chain
- Have a contingency plan – management teams meeting more regularly to review continuity plans and making and updating contingency plans in line with developments
As with any area of the law, where there is such uncertainty, much will depend on the facts and each property would need to be analysed on a case by case basis with appropriate advice sought.
Collaboration, co-operation and advice
The UK government has announced the move from the “containment” phase to “delay” as it attempts to slow the spread of the virus and delay the epidemics peak. Everyone (whether that be in the real estate sector or beyond) has a part to play and should try to co-operate, communicate and work together to help manage the situation in a sensible and safe way.
Being proactive and taking appropriate advice at an early stage could prevent and/or reduce the risk of an outbreak or, if a case of the virus has been identified, help to contain and manage the situation. In addition, it could help reduce the risk of a dispute and help plan for any potential scenarios that could arise as the impact of the virus continues to evolve.
Covid 19 - Coronavirus
Our advice on dealing with the impact of coronavirus.