[co-author: Susannah Moody]
As hand gels and toilet paper fly off the shelves and children across the world cross their fingers for school closures, the COVID-19 strain of coronavirus has taken over the news. The outbreak has now been declared as a pandemic and is showing few signs of slowing. But what does the virus mean for commercial landlords and tenants?
How can landlords keep their buildings safe?
Unfortunately, they can’t. Washing hands and self-isolating after visiting affected areas can help to contain the spread of the virus, but from a landlord’s perspective such measures are totally reliant on the compliance – not to mention hygiene – of the tenants and their visitors, and the landlord’s own staff.
Whilst there can be no certainty in keeping the virus out of their buildings, landlords can take certain measures to protect them – and should. Unlike registered medical practitioners, landlords are not yet under any statutory obligations to notify positive cases to the local authority, and there are no specific statutory duties in relation to COVID-19 to be followed. However, commercial landlords are under a general obligation to take reasonable measures to protect the health and safety of their tenants and anyone entering the building. In addition to this, many commercial landlords have an explicit right in the terms of their leases to impose reasonable regulations on their tenants, with which the tenants would be obliged to comply.
What regulations should a landlord consider introducing?
But what is a reasonable measure or a reasonable regulation in this fairly extraordinary situation? Barring visitors who have visited affected areas or enforcing deep cleaning might interfere with the tenants’ rights to quiet enjoyment of their premises. But on the other hand, if it became illegal (for example) to open a shopping centre because of the virus, then quiet enjoyment would necessarily be trumped.
Fortunately, Public Health England has issued best practice guidance on COVID-19 in the workplace. It’s not set in stone, but asking tenants to adopt this guidance as building policy is surely a reasonable measure for the landlord to take from a health and safety perspective, and the guidance itself should constitute reasonable regulations in the workplace.
The guidance sets out what employers should do, both whilst someone is awaiting test results and if that someone tests positive for COVID-19. In the first scenario, the guidance points out that most cases turn out to be negative, but the individual should self-isolate pending the test results.
If there is a positive result, the local health protection team will undertake a risk assessment of the workplace and help the management team work out a deep cleaning and waste removal plan for communal spaces, and where necessary an isolation strategy for staff.
What if the landlord’s employees are affected?
From a landlord’s perspective, if a tenant’s staff are infected then it will be the tenant’s responsibility to manage the situation directly and work with the local medical authorities to control the spread of COVID-19. But if the landlord’s own on-site staff or contractors (e.g. cleaning, security, reception, management etc personnel) are infected, responsibility will fall to the landlord. The service charge provisions in leases may not enable the landlord to recover all the costs that stem from this, but that will need to be checked on a case by case basis. For instance, the costs of deep cleaning the common parts of a building might go beyond what is recoverable under the service charge (although a compliance with laws clause may allow the landlord to recover them instead). Infection of staff and their workplace i.e. the common parts of a building – could also lead to the building being closed because the landlord can’t provide the necessary services to keep it operational, which brings us back to landlord breach of its lease obligations.
Can you simply close a building?
If the situation becomes critical, the government could take steps to close premises in an attempt to prevent the spread of the disease. In such instances landlords should carefully consider the terms of their obligations. Disgruntled tenants could try to claim against landlords for derogation from grant, or breach of quiet enjoyment / keep open clauses (although, as noted above, if it becomes unlawful for the landlord to allow the building to open, that should be a sufficient defence). However leases are likely to make provision for the closure of common parts in an emergency, and the principle of lawful interruption should also help protect landlords against such claims.
Are any sectors particularly exposed?
As well as the burden of looking out for the interests of customers and employees, businesses operating in the retail, hospitality and leisure industries will feel the impact of footfall decline as customers remain indoors to avoid the virus (and particularly if buildings close). The decline in hotel occupancy in the UK is already remarkable, in China it is almost total. The tourism industry will also be struggling – while staycationing may help regions it is unlikely that big cities will see anything like the tourist spend that they are used to. The associated drop in income will undoubtedly put cashflow pressure on tenants, and potentially on their banking arrangements.
Developers are also likely to feel some impact. Tenant decision making around new space is likely to be cooled, dampening the demand curve. But developers and contractors are also likely to feel the heat through their supply chain, with workers throughout the chain unable to fulfil their roles and materials sourced from areas in lockdown becoming unavailable. We are already seeing evidence of contractors requiring the impact of COVID-19 to be included as a force majeure event. We also know of cladding supplies being delayed because the factories aren’t able to meet orders.
And then there is the housing market, just recovering from two years of economic and political stagnation – early indications are that the flames of recovery are more like a pilot light. This may be of benefit to those providing rental accommodation but equally the co-living/student housing (particularly those that traditionally have a lot of international occupiers) providers may see a fall in demand.
There is a silver lining for some. While bricks and mortar retailers struggle, e-commerce volumes are going up materially in a market that already has the deepest e-retailing penetration in the world. Online supermarkets and other retailers are already seeing increased income from their online operations which in turn will of course benefit the logistics sector.
How will the credit markets react?
We know that some major banks are currently reviewing all of their positions with borrowers in the retail, hospitality and leisure sectors. There will be concerns about EBITDA, interest cover and loan to value covenant breaches, and any lending that is maturing for renewal will surely be looked at with additional scrutiny – particularly if trading volumes decrease. If lenders start withdrawing from the credit markets things could get very serious indeed. The cut in interest rates is of course likely to help, but as rates were so low already the benefit of that may be quite moderate.
Will tenants be able to walk away from their leases if they can’t use their premises?
It is unlikely that COVID-19 alone will provide an opportunity for any tenant to step away from its lease obligations.
As we saw in the recent EMA case, the High Court has set down challenging hurdles to claims for frustration, and force majeure clauses are unlikely to apply here.
More on trend, though, is the use of the Company Voluntary Arrangement (CVA) process by many companies (particularly retailers) to reduce lease liabilities. There could be a new wave of CVAs particularly in the retail, hospitality and leisure sectors. However what is also possible is that (particularly with a rent quarter day coming) a material, and sudden, negative impact on revenue means there is no time for a CVA and the tenant will have to seek a rent holiday/concession or, worse, the protection of administration or another insolvency process.
Can a tenant get a rent suspension?
Some tenants may struggle to meet rental payments, though it is unlikely that landlords would seek to forfeit leases. This raises the tricky issue of balancing interests. Should tenants continue to pay rent even if their premises are forced to close, but then should the landlord bear the loss of income if its loss of rent insurance would not cover it for a rent suspension in these circumstances? Now that COVID-19 is a notifiable disease, rent may be recoverable under a tenant’s business interruption insurance, providing some relief for those with applicable policies.
Conclusion: practical ramifications in the short and long-term
The UK government has estimated that, in a worst-case scenario, up to a fifth of the workforce could be absent from work at any one time. This will result in a surge in remote working where offices or parts of organisations are closed and businesses will bring in alternating work practices and team rotations. Businesses that make this work well may see a future with more remote working and less need for physical space. Agile working is not a new phenomenon, but COVID-19 could be the catalyst to a sudden, significant and permanent change in occupational requirements.
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