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Mishcon Academy: Digital Sessions - Challenges for the Real Estate Industry in the current climate

Posted on 04 May 2020

Mishcon Academy: Digital Sessions are a series of online events, videos and podcasts looking at the biggest issues faced by businesses and individuals today.

This live session was held on 30 April 2020. The information in the film is correct at the time of recording.

Nick Doffman  

Good afternoon ladies and gentlemen and members of the Mishcon family and welcome to this Digital Session on COVID 19 and the challenges to the Real Estate Industry. My name is Nick Doffman and I am a Partner in the Real Estate department here at Mishcon.  Joining me on the panel today are four of my Partners; Joanna Lampert from our property litigation team, Richard Gerstein from our Construction team, Anita Rivera from our Planning team and Omega Poole from our Debt Advisory team.  So, Joanna, we will start with you first. The current lockdown situation is obviously problematic for both landlords and tenants, offices and flexible working spaces, bars, pubs, restaurants and retail units have all been forced to close their doors. Could you outline some of the key developments in this arena introduced by the Corona Virus Act 2020 and what avenues may be open to landlords and tenants as they navigate through this uncertainty?

Joanna Lampert            

I think it is clear to all of us in the Real Estate Industry by now, that the Government's priority at the moment, is to protect the [xxx] and to save jobs, starting with the initial moratorium of forfeiture which was enacted within 24 hours of it being announced. this was followed up a couple of weeks later by the announcement which was made at this time last week, of a further moratorium on the presentation of statutory demands and winding up petitions to collect rent when we don’t yet have any detail of the changes.  There is still no draft legislation but there has been much fanfare both from the Government and in particular, retailers, about this new legislation and the Government has made clear that it is willing to progress steps to protect tenants from aggressive landlords. Now, some might say that there is nothing aggressive about taking steps to recover what is contractually due to you.  The Government has said specifically in the Corona Virus Act 2020, this legislation is temporary and it does not waive or in any way, alter a tenant's liability to pay rent.

Nick Doffman  

And how is insurance going to assist, either landlords or tenants?

Joanna Lampert

We have seen as a team, some signs of insured parties being given misleading advice by brokers and insurers as to the extent of their cover and it is well worth getting an independent view of an particular insurance policy. So, it isn't necessarily clauses around disease or notifiable disease or pandemic that are responsive in the present situation.  Some of the more promising cover relates to denial of access or loss of attraction or the actions of competent authorities.

Nick Doffman  

We hear a lot about the concepts of frustration and force measure. How is this going to impact on the Landlord and tenant relationship?

Joanna Lampert

Force Measure is not going to help at all.  Frustration is a difficult concept and The English Courts have held that in principle, leases can be frustrated, but given all the hundreds of years of property law that we have behind us, there is currently no reported case of a lease actually having been frustrated in English law.  The important thing to bear in mind given the current pandemic is that frustration is a full time thing, if a lease is frustrated; it comes to an end forever.  It is unlikely to intervene to bring a lease to an end, other than perhaps, in very unique and exceptional circumstances.

Nick Doffman  

Richard, let's turn to construction please and the construction industry.  It is inevitable that we see disruption to ongoing construction projects.  What are some of the key considerations, specifically what grounds are there for the suspension ad termination of contracts and what other advice can you offer in managing those contracts?

Richard Gerstein          

The un-amended JCT Contract has two provisions in it, which may be relevant. One is Force Measure. The other provision is the exercise by The Government of statutory power.  What The Construction Industry Council has done is provide a set of site operating procedures, and what these procedures are stating is that, if a site does not consistently implement the measures set out by Public Health of England and that activity cannot take place safely, it should not take place at all.  So, what about ongoing sites?  I touched base on this briefly before about Health and Safety and under the JCT, the contractors obliged to comply with the CDM Regulations but the principle designer still has responsibilities for health and safety file. What we are seeing happening is discussions taking place between parties to a construction contract as to variation of the terms and I have seen some parties agreeing to close down the sites on certain terms under liquidator damages clauses.  I think you just need to be very careful with these because there is an implication for all the other parties to the project.  If you give instructions to close the site, then you are liable, not only to an extension of time but also to loss and expense.  An interesting point has come up with one of our clients recently, they asked me whether, as an employer, they liable if any of the contractors or workforce caught COVID 19 when they were actually on the site.  JCT provides that the contractor should indemnify an employer against such liability and also provide insurance for that.

Nick Doffman  

Anita, let's talk planning.  We have heard from Richard about delays and uncertainty within the construction process.  How is the planning regime adapting to the current situation and should the Government intervene to encourage development in the hope of stimulating the economy?

Anita Rivera     

I think it is fair to say that the planning regime is going to play a crucial role in helping to kick-start the economic recovery following this lockdown. So, which changes to the planning regime have actually been implemented so far? The first and immediate response has been to create new permitted development rights.  Now, these new rights allow a temporary change of use from pubs, restaurants and cafes to operate as a food takeaway.  The rights cease to apply either on 23 March 2021 or when the temporary use ends, whichever is the earlier.  The other major development arising is the creation of virtual planning committees so that local planning authorities can still make decisions.  The regulations have come into force, which now allows councils to make planning decisions using virtual committees by video conferencing software such as Zoom and Microsoft, everything that we are now used to.  Councils across the UK have really embraced this.  In London in particular, I would say half of London Authorities have either already had a virtual planning committee or they are planning one.  So now, I am going to talk about what the main concerns are facing the industry and what might be on the horizon to address them.  Planning appeals can still be logged with the Planning Inspector which we call PINS.  The problem is that because there are no physical site visits, there are no hearings and no enquiries currently being held.  They will be trialling their first digital hearings, I would suspect that it is probably going to be on a single matter, probably uncontroversial issue.  They are really hopeful of rolling out over the next three to six months so that it is fully up and running.  Now, we understand the Government is still currently considering to implement automatic extension of time for planning consent of up to a year but until those close provisions are enacted, the only course of action available is to preserve your planning consent by way of lawfully implementing it before it expires.  Another big issue facing landowners, developers and those with planning consents is the community infrastructure levy.  So, we all know that the sealed regulations are notoriously inflexible and they do not include exceptional circumstances that deal with a lockdown event like COVID 19.  There is no postponement of a sealed liability, you must pay.  For developers this creates a real catch 22 situation.  Do you preserve your planning consent by implementing it and less incur a seal liability or do you let the consent fall away?

Nick Doffman  

Is COVID 19 the final nail in the coffin for the high-street?

Anita Rivera     

I think it is fair to say that the high-street was in dire straits even before COVID 19.  One of the things that the Government put forward was to widen the scope of Class A and make it more flexible.  The Use Class Order is incredibly restrictive about what users are allowed where and opening that up has to happen sooner rather than later, we have to think creatively, openly and more broadly.

Nick Doffman  

Omega, finally over to you.  Understandably, there has been a nervousness in the real estate finance market.  Can you tell us a little bit about trends that you are seeing in terms of both existing finance, new lending and are there particular assets we can expect to see fare better than others?

Omega Poole   

So we are definitely still seeing deals being done and there are certainly lenders who have appetite to lend and are still very much open for business in the market but that said, the real estate finance market now is, markedly different from that pre COVID 19.  If I start with existing lending, as you might expect, lenders with legacy books have rightly been focusing on running through their books, assessing what losses they might have.  Anecdotally, the feedback I have had from lenders is that they appreciate that the pandemic is not just, if you like, borrow or equity risk, but it is something that there will be some element of risk sharing across the fees including lenders taking potentially some element of pain.  Lenders have their own regulatory requirements to meet. They have their own risk parameters and potentially their own capital constraints.  If we turn now to new lending, for the most part, lenders seem to be honouring commitments that they have made in principle with the potential exception of retail and hospitality transactions.  We have seen some cases where lenders have pulled out even where deals are already in documentation stage but on the flip-side, we have seen other lenders step up into the breach and the shoes of that previous lender and take over that transaction.  The feedback that we are getting from some of our contacts is, that their enquiries on an average basis are maybe double, what they would be say this time last year.  Some of the lenders who are really relationship focused see this as a good opportunity to displace perhaps more traditional lenders. We are certainly seeing a pullback in leverage appetites.  Finally, just to touch on your question, Nick about asset classes.  It is probably no surprise to anybody that hospitality and retail assets are particularly challenging to finance at the moment, but we are seeing some lenders who are able to adopt a slightly more initiative approach so maybe you are looking to finance a hotel ad taking security over another asset within the wider portfolio.

Nick Doffman  

Do you think that is an inevitable part of the recovery of the economy?

Omega Poole   

Once there is an understanding of what values may look like going forward then we shall certainly see an opening up of the taps in terms of finance that may be available. 

Nick Doffman  

I have here, probably for you Joanna.  We are a retailer and want to put a clause in new leases that rent is not payable if our turnover goes less than x to cover for future pandemics.  Do you think this will wash?

Joanna Lampert

I think that ultimately, the market is going to have to find a new equilibrium.  Now that we can foresee the future, the market is going to have to decide how it wants to adapt and deal with a future pandemic and shut down.  We have two diametrically opposed positions from landlords and tenants and each will want to gain some measure of protection and I suspect that it will be one of those things where there is a meeting in the middle.

Nick Doffman  

Richard, one for you. Social distancing has kept us at home with only essential services open such as hospitals, food retailers etc. but as some point, most of us will return to the workplace.  Given the environmental benefits such as improved air quality that we have seen as a side effect of lockdown, are there any ways that we can change the design of our built environment to make it healthier?

Richard Gerstein                      

I think one of the really interesting things that we have seen, over the last few months and has definitely been a reasonable take up in the UK is the development of digital fabrication.  Product being built and buildings being built, essentially off site, digitally and coming to site to be effectively screwed together when they are there and I think that is going to make a big difference. I think it is going to make a big difference to the way in which building sites operate although conversely it is going to mean quite a lot of road traffic with things being shipped to site and that is going to have an adverse effect obviously on the environment.

Nick Doffman  

What, in your view, is the biggest challenge facing thr Real Estate industry in the next 3 to 6 months?

Joanna Lampert

Unpaid rent. Tenants who are going to struggle to pay it, landlords who are going to struggle to collect it.

Richard Gerstein                      

I mean essentially it is going to be cash flow. Cash flow within the Construction Industry and making sure that the funds are in place to do the work that they promised to do.

Omega Poole   

I think valuations in terms of market information, trading information but also practicalities of getting on site for example.

Anita Rivera     

I think it is going to be financial evaluation of schemes to see whether they actually balance the books and make it desirable to deliver new schemes.

Nick Doffman  

For our latest guidance and online content related to COVID 19, you can visit our hub at www.mishcon.com/covid19 and if you have any follow up questions, please feel free to contact us on our dedicated email address at coronavirus@mishcon.com. That just leaves me to say thank you very much, I wish you all a good afternoon and obviously to continue good health and wellbeing. Goodbye.

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