Shared & Halved - Occupier

To support clients and colleagues working in the Real Estate Occupier community, Shoosmiths hosted a webinar on 9th April 2020 looking at some of the most pressing issues impacting the sector in light of the unique challenges posed by COVID-19.

Introduction

Coronavirus COVID-19 is a crisis unlike any other we have faced as a country, presenting a new and varied set of challenges to UK and global business. Based on what you have told us is more important to you in the current climate we have devised a series of webinars aimed at you to look at implications. In this webinar we looked at how the property industry is working together to mitigate the worst effects of COVID-19 on businesses.  Below are our key tips and takeaways.

Introduction by Beth McArdle, Partner Shoosmiths LLP

• Save for a few isolated examples we are seeing all parties want to ensure when this Is over they can all continue to operate as they had before and can retain all staff and jobs to ensure the operations resume seamlessly.

Break Conditions - if break notice already served by Kirsty Black and Paul Knight, both Partners Shoosmiths LLP

• Current position is that strict compliance is required but this is a difficult area.
• If access cannot be granted to site and contactors instructed this could open the floodgates for claims if Landlord’s do not show some understanding to the current situation.
• We would recommend that you take all necessary steps to show that you have tried to comply but are having difficulties in light of the current situation. If you do this and speak to the landlord this could assist should an issue arise.
• It may also be possible to agree a short term deal with the landlord in order to remain in occupation after the break date to allow compliance with the conditions.

Break Conditions – Horizon gazing by Michael Callaghan, PSL Shoosmiths LLP

• Courts have only historically considered cases where tenants previously could have complied with the break conditions but chose not to.
• Whereas the current situation deals with an inability to be able to comply, as such it is unlikely (but not impossible as this has not yet been tested) that a court would enforce strict compliance. Instead it is likely that the courts would be sympathetic to the current situation.

Break Conditions – tenant perspective of the market by Russell Jerrard, Braiser Freeth

• It is early days but expect to see tenants using the time to serve breaks in order to renegotiate deals.

Break Conditions – landlord perspective of the market by Damien Sumner, Braiser Freeth

• There are some instances where landlords are allowing breaks to be valid in light of the current circumstance where conditions have not been complied with provided that a licence to granted after lockdown to allow compliance.

Break Conditions – transactional perspective by Alex Kittlety, Senior Associate Shoosmiths LLP

• Not just looking retrospectively at what could happen but also looking to what could happen in the future and drafting provisions based on numerous scenarios.

Categorisation of retailers,  Damien Sumner and Kim Wilson by Braiser Freeth

• In some shopping centres landlords are looking to categorise the tenant on the basis of their use and trade but finalising how to proceed in the current situations.
• There is also some delay whilst landlords discuss their options with the banks.

COVID-19 – lease drafting by Choi Man and Alex Kittlety, Partner and Senior Associate both Shoosmiths LLP

• In agreement for lease we are seeing options to extend out conditions if there are concerns with compliance due to the current situation and also ways to extend any dates such as longstop dates again due to the current situation.
• Most people are considering extending provisions not just to COVID-19 but other possible diseases to cover anything further in the future.
• If deals have already been agreed but are struggling to complete on we are seeing supplemental agreements to add in protective wording and extend dates where necessary to avoid termination.
• It is also necessary to consider third party bodies such as Councils with planning and construction where issues may arise outside of the parties’ control.
• In leases we are seeing requirements on operational provisions to ensure tenants are not found to be in breach where compliance is not possible, such as  service of notice, repair, compliance with statute and regulations, yield up etc.

COVID-19 – grants by Nick Iliff, Partner Shoosmiths LLP

• These issues are quite complicated as it is not obvious what may or may not keep businesses in operation.
• The grants offered are connected to rateable value and the area the business operates within. However this needs to be looked at carefully and beyond just grant support as there are other options also available such as furlough, tax deferral and relief from forfeiture.
• The Government also has a loan scheme in place that could also help some tenants.
• The 2021 expanded discount is not state aid, whilst the 2019/20 is listed as counting towards state aid but both are considered separately so would count towards threshold but not the EUR800,000.

Deal structures by Choi Man and Alex Kittlety, Partner and Senior Associate both Shoosmiths LLP

• These are a lot more flexible and include rolling break and rent being linked to turnover.
• Some landlords are discussing rent deferments and holidays as concessions.
• Caution should be taken when entering into side letters or variations that any other personal concessions are not lost as a result of the newer terms agreed and that it does not impact any financial arrangement with banks etc.
• There are also some who believe lease terms may decrease as a result of this.

Enforcement issues by Russell Jerrard and Damien Sumner, both at Braiser Freeth and Kirsty Black and Michael Callaghan, Partner and PSL both at Shoosmiths LLP

• Moratorium on forfeiture only applies to June not sure what will be decided after this.
• CRAR and Stat Demands can both still be issued in the interim but there are ongoing discussions on this.
• Some landlords are issuing stat demand which could if progressed lead to assets being frozen and accounts being locked and could impact on banking arrangements.
• Consider incorporating into drafting to avoid future issues whilst discussions are ongoing.

Since the webinar took place, the Government has issued further guidance stating that statutory demands may not be used in the period 1 March 2020 to 30 June 2020 nor may winding-up petitions presented on or after 27 April 2020 in respect of a company’s inability to pay its debts due to COVID-19. In addition, regulations have been issued restricting the use of CRAR to circumstances where 90 days’ or more rent are in arrears.

Entry to comply – schedule of dilapidations by Kirsty Black and Paul Knight, both Partners Shoosmiths LLP

• Once leases expire there is no right to occupy.
• Best option round this would be to negotiate a licence to permit access to comply as keeps dealing with the issues within the tenant’s control.
• This is not always possible as some landlord’s do just want the cash in their pocket and may proceed by serving terminal schedules of dilapidations.
• Need to consider all options carefully.

Rates by Michael Callaghan and Nick Iliff, PSL and Partner both of Shoosmiths LLP

• Consider if Local Authority has considered the requirements carefully and if you should receive any funds.
• If receive funds incorrectly should look to return to the Local Authority.
• If claiming rates relief remember will only benefit up to the point occupation ceases.

Remedies and recovery by Michael Callaghan and Nick Iliff, PSL and Partner both of Shoosmiths LLP

• There is no universal rent free period being considered just a relief from forfeiture.
• Await an update as to what may be considered of offered as approach the next quarter day.
• If parties are struggling should talk to their banks who are also being encouraged to offer support.