As the country proceeds through the opening-up phase, post-lockdown, both landlords and tenants are faced with an array of new obligations, additional considerations and practical issues which need to be managed and complied with.
Leasing
Understandably, much of the focus for landlords and tenants has been around the payment of rent. On 19 June, the government published a code of practice to encourage commercial landlords and tenants to work together to protect viable businesses and the moratorium on forfeiture for non-payment of rent by commercial tenants has been extended until 30 September.
Looking forward, landlords and tenants are likely to have additional concerns. Businesses have needed to be flexible during the pandemic – for example, many restaurants currently operating as takeaways. Although a new permitted development right has allowed this change of use under planning law, the user clause in a tenant’s lease may not necessarily permit the same. If a tenant acts in breach of its user clause this gives rise to a right of forfeiture by the landlord.
Going forward, tenants may look to negotiate more flexible user clauses enabling them to operate in a different capacity should the circumstances require or simply to use under-utilised space more innovatively. Although landlords will want to ensure a tenant’s business remains operational, many will still, understandably, want to control a tenant’s ability to change use (via a requirement for landlord’s consent, not to be unreasonably withheld) to protect their investment and control estate management.
Rent suspension clauses, which typically apply where there has been damage or destruction to the premises (as opposed to a tenant’s business), may become more heavily negotiated as tenants attempt to extend coverage to periods whereby their premises cannot be used (or accessed) because of mandatory measures imposed by the government, either in relation to Covid-19 specifically or for wider pandemic purposes. Landlords and, indeed, lenders may resist such provisions, preferring instead to rely on the negotiation of temporary rent arrangements, if required.
Landlords with service charge commitments will already be aware of their additional obligations, pursuant to government guidance, in respect of common and shared areas. Increased reliance on community hygiene and social distancing will bring an increased operational intensity and landlords will want to ensure that any additional costs can be recouped from their tenants via a well-drafted service charge mechanism in the lease.
This is by no means an exhaustive list of lease considerations. In terms of what the market will consider the new normal for leasing, this is, as yet, unknown.
Health & safety
Efforts to control the spread of Covid-19 are shifting from a primarily public health-based approach to one which focuses more on the health and safety duties of private economic actors.
Those duties are prescribed by the Health and Safety at Work etc Act 1974 (the 1974 Act). Broadly, the 1974 Act imposes duties on various classes of people (be they individuals or corporate entities) to take all “reasonably practicable” measures necessary to control and manage health and safety. Failure to comply with the 1974 Act can result in fines and, in serious cases, custodial sentences.
The duties in relation to Covid-19 (which are in addition to existing health and safety duties) are, in essence, to follow the government’s 11 May 2020 Working safely during coronavirus (Covid-19) guidance. This guidance serves to flesh-out the 1974 Act’s outcomes-focused duties and the relevant regulatory bodies, the Health and Safety Executive and local authorities, will base their monitoring and enforcement activities around it. It is essential, however, to remember that each relevant operator must adapt the implementation of the guidance to their specific circumstances, including by seeking specialist or technical advice and input where necessary.
It is also important to consider, the Reporting of Injuries, Diseases and Dangerous Occurrences Regulations 2013, which impose reporting requirements in respect of cases of, or deaths from, Covid-19. The Regulations only apply, however, to exposure as a result of a person’s work. A failure to report can attract criminal liability.
In a real estate context, landlords who have wholly let out premises and have no ongoing presence there are unlikely to have any new obligations. They may, however, be asked by their tenants to show some flexibility around enforcing lease terms to enable those tenants to meet their health and safety obligations. Landlords who retain control over part of a building – in relation to access areas or other common parts – will have health and safety obligations in respect of people using those parts, including their employees, members of the public and contractors, and will, where applicable, need to follow the guidance, including as that guidance changes over time.
Data protection
To date, there have been no changes to the legislative framework applicable to the processing of personal data in the UK because of Brexit or Covid-19. The General Data Protection Regulation applies until the end of the transition period, with the Data Protection Act 2018 adding local implementation and the parameters of permitted derogations.
What has changed following the outbreak is the types of processing and personal data processed by controllers. Ensuring the health of tenants, employees, and visitors has forced the gathering and sharing of information on individuals’ health that was not previously relevant, and made many tenants into processors of such “special category” data for the first time. Any new processing requires a refresh of the compliance procedures in place, including the obligation to notify data subjects. Routine processing of special category data also requires a data protection impact assessment (DPIA).
The Information Commissioner’s Office, the UK supervisory authority, has issued guidance to controllers on its enforcement policy in light of Covid-19 and controllers’ response to lockdown and the reopening of business. This sets out an “empathetic and pragmatic approach” to enforcement. This indicates a certain amount of leeway to be given, but controllers should be aware that this is not the same as a relaxation of the applicable laws, especially the fixed time periods such as that for responding to subject access requests.
One area where other countries have opted to include specific provisions in the law is to the routine processing of body temperature, with France and Portugal notably bringing in specific provisions in the last two months. Body temperature, where it is attributable to an identifiable individual, is personal data and is subject to the special category rules. As such, processing is forbidden under the GDPR unless one of a list of conditions applies. While employers can carry out monitoring of body temperature that is proportional and necessary for the protection of employee health, landlords and tenants of buildings must take a different approach, either by anonymising the data or ensuring their monitoring procedures are otherwise outside the scope of the GDPR.
Financial management
Covid-19 has placed considerable financial stress on tenants, particularly as high street and hospitality closures have reduced footfall and turnover. To state the obvious, failures to pay rents have also become a problem for landlords and their lenders. While there have been considerable policy interventions which have eased the position, including in relation to furloughing, a considerable number of rental payments have been missed or not met in full.
Protections have been provided to tenants on some fronts, not least the ban on forfeiture for non-payment. In addition, the recently passed Corporate Insolvency and Governance Act 2020 has introduced temporary measures to protect those in debt, including tenants in financial difficulty. Until 30 September, a ban has been imposed on the service of statutory demands. Similarly, winding-up petitions cannot be heard, subject to limited exceptions (demands served before 1 March, in relation to unsatisfied judgment debts or where presented by reference to failures to meet the cash flow or balance sheet insolvency tests). Petitions can only be granted where the insolvency would have come about regardless of Covid-19. The legislation also has retrospective effect.
Additionally, directors’ duties in relation to “wrongful trading” (ie trading when it is clear the company is headed for insolvency) have been relaxed so as not to penalise them for the worsening of the financial position of their companies while Covid-19 lasts.
At some point, though, the pandemic will abate and the temporary measures will cease to apply. None of those measures serve to reduce rent accruing and so it can be anticipated that, when we exit the crisis, there will be material arrears burdens that have to be addressed. It can also be anticipated that while many landlords and lenders involved in the market have given forbearance during the crisis, negotiated programmes will need to be put in place between landlords, tenants and lenders to address those debt overhangs. What tools are used in order to do that will depend in part on the post-pandemic prospects of the relevant parties in a world which may be quite different. All parties are likely to be engaged now in planning for how they will rebuild their financial position when the clouds lift.
It is still early days in terms of clarity on what the new normal will be, but if we have learnt anything from navigating our way through the last few months, it is the need to adapt quickly.
Rachel Whittaker is a practice group counsel in real estate, Aonghus Heatley is a senior associate in environment, Ewen Mitchell is a consultant in IP & data protection and Ian Jack is a shareholder in restructuring & bankruptcy at Greenberg Traurig LLP
