Covid-19: Provisions in Commercial Property Contracts

Insights - 05/05/2020

Aranja Pillai, a Solicitor in our Commercial Property department, looks at possible amendments to standard contract documents as a result of the effects of COVID-19 on commercial property.

We are nearly two months into the Government enforced lockdown due to the COVID-19 pandemic, which is affecting lives and businesses worldwide. These are unprecedented and challenging times and one way we can adapt for the purposes of ensuring business continuity is by amending legal documents such as agreements for lease, leases and contracts for the sale and purchase of commercial property.

Agreement for Lease

This is a binding agreement between a landlord and a prospective tenant to grant or accept a lease in the future. Matters that need to be dealt with before the lease is signed can be included in this document.  For example, carrying out works to make the property fit for occupation or obtaining planning permission required for a property’s use.

If an agreement for lease has already been entered into by the landlord and tenant, then there may be a risk of not completing on time due to issues arising from COVID-19. As a consequence, the party who is unable to complete on the specified completion date may be liable to pay compensation for late completion. In order to deal with this the parties could look to vary the terms of this document to provide that:

  1. A party will not be in breach of its obligations because of a delay caused by COVID-19
  2. The parties’ right to serve a notice to complete will be suspended while an event related to COVID-19 is preventing the other party from completing
  3. Either party may terminate the agreement if completion does not occur by an extended specified long-stop date.

It should also be noted that amending an agreement for lease could be seen as creating a new or supplemental contract or even the original agreement ending and being replaced by a new one. If the lease being granted is to be contracted out of the Landlord and Tenant Act 1954 (i.e. giving the tenant no right to remain in the property at the end of the term), then the contracting out procedure would need to be followed again. As it is difficult to swear a statutory declaration at the moment, the longer simple declaration procedure might be required, meaning a 14 day delay between serving any notices and entering into any agreement for lease.

Lease

Leases could be drafted to take into consideration the COVID-19 pandemic. For example, tenants may request that their landlords insure against COVID-19 related diseases or any disease relating to a pandemic. This does mean that insurance premiums may increase.

Suspension of rent clauses could be added so that if a tenant is required to close its business due to a pandemic (in line with Government guidelines), then payment of annual rent is  suspended until such time that the business can be reopened.

The Landlord should consider how wide the criteria for suspension should be, if any rent not paid during this time is to be recouped at a later date or, if it is accepted that no rent for this payment will be paid.

It may be preferable for any rent suspension to be documented in a side letter rather than in the actual lease.

Commercial Property Sale and Purchase Contracts

As mentioned above in an agreement for lease, there is a risk that a party who is unable to complete on the specified completion date may pay compensation for late completion. In addition, the buyer could risk losing its deposit.

Provisions in the contract can be varied to consider delays which may occur due to COVID-19. When it comes to commercial property sale and purchase contracts, parties should consider the following:

  1. If a seller is required to deliver documents after completion such as a rent authority letter, then the seller should consider its obligations and how those obligations can be complied with to ensure there are no breaches or problems.
  2. If a buyer is buying a property subject to a lease and the seller is unable to provide service charge accounts/information during the transaction and after completion, how can the buyer prevent breaching responsibilities as landlord in any occupational lease?
  3. If the property is leasehold and landlord (and any superior landlord) consents are needed, additional provisions may be required to deal with the situation in which obtaining the consent is affected by the COVID-19 pandemic. For example, if the landlord’s consent to a transfer of the lease requires completion within a set period, a COVID-19 related event could push completion past the date when the consent ceases to be valid meaning a landlord could ask for fresh information in order to consider granting a further consent. Should provisions be inserted to stop that happening? Should the timeframe be lengthened?

Comments

Whilst the clause suggestions mentioned above are to help parties during the COVID-19 pandemic, not every possibility can be covered. Government measures may be introduced or relaxed at short notice and people may be ill or need to self-isolate with little or no warning. Different situations to those highlighted above may need to be considered. Of course, clauses must be tailored to fit the precise circumstances of the transaction.

It is clear that we are facing new challenges as a consequence of the COVID-19 pandemic, but at Morrisons Solicitors LLP, we are committed to helping our clients through these challenging times.

If you have any questions or would like to discuss any of the issues raised in this blog, please feel free to contact Aranja Pillai, a Solicitor within our Commercial Property team. Aranja is contactable by email at [email protected]

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Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.