What next for the real estate sector? How does the law protect you in today’s changing environment?

There has been an impressive and rapid response to the COVID-19 crisis, with legal solutions being found to address most immediate issues. Now the crisis matures and the economy moves into recession, many businesses are taking stock and planning for the next stage. What will be the likely opportunities and obstacles to emerge and how can the law assist?

We have already seen some immediate and potentially permanent shifts: a clearer delineation between sectors, online transactions and working and immediate cash flow issues resulting in a short term focus. These factors necessitate more tailored advice from professionals. 

Certain sectors are enjoying a boom, requiring increasing warehouse space and industrial premises, such as the logistics sector and online retail and suppliers of medical equipment and other goods considered to be necessities. Lettings are increasing where further space is required to enable the performance of publicly funded contracts.

In the residential market, demand is likely to change to accommodate more home working resulting in greater flexibility of location, the need for home office space and fast and reliable broadband. Gardens, communal outdoor space and a strong local community will also be increasingly important to buyers. Reduced office and retail demand could well result in unlet vacant premises being converted for residential use.

Due diligence

We have seen buyers and sellers, landlords and tenants still willing to transact in this environment, being keen to agree and complete their deals as quickly as possible to secure income or competitive terms. The temptation is therefore to reduce the level of due diligence. Incomplete due diligence poses a risk, with reduced ability to rely on valuations and site visits immediately prior to exchange, and may have long term impacts. The anticipated rise in sales by insolvency practitioners are conducted with limited title guarantee and limited information and representations. These may represent opportunities but those transacting must do so with eyes wide open and being commercially aware of the risks involved.

Meeting payment obligations

The pace of funding has slowed as lenders have struggled to obtain valuations and been busy dealing with requests for government backed loans. Some lenders have displayed pragmatism by relying on desk top valuations and not fully stress testing tenant covenants. The valuations issue is now decreasing. We have seen short term funding provided to ease cash flow issues. In all opportunities requiring funding, the nature of the sector is crucial. We have seen that funding may not be readily available if there is no immediate income stream from the property in situations where this would usually occur. 

For developers, there has been no relaxation of requirements to make payments under CIL or planning agreements, but deferral opportunities are available with direct agreement with local authorities. 

In the construction sector, contractors are increasingly footing the bill for the increased costs of social distancing which is more of an issue for independent contractors. A government advisory note encourages public bodies to provide relief for suppliers encountering financial hardship; however, in practice, this has taken the form of reduced payment periods only. 

Timing

In current projects, extensions to conditions precedent and rent free periods are proving popular; however, these should be formally documented by a deed of variation. For current landlords and tenants there is much activity agreeing payment plans and variations.

For current purchases where contracts have been exchanged, we have seen agreements terminated with the loss of the deposit. It should be borne in mind that a seller may also have a claim for damages. 

COVID-19 extension clauses are being requested by new tenants and purchasers but may be unacceptable to some and a longer completion date with greater certainty may be preferred. There is a renewed focus on the flexibility provided by lock-out agreements and options.

For those seeking planning consents to meet contractual obligations, there has been no relaxation of planning requirements for e.g. environmental assessments. While the lockdown has begun to be lifted, there will be a backlog of work. There is also no relaxation of the requirement to implement a planning consent within a set period of time. 

Local authorities are now permitted to hold planning meetings virtually which has enabled developers to continue to progress projects, albeit appeals cannot be heard virtually. There is a clear risk of judicial review if technology is not correctly used. 

Corporate tenants who delayed relocations pending Brexit are likely to delay further and may benefit from certainty of timing by formalising extensions and reviewing or introducing their future exit route, such as break clauses.

The COVID-19 crisis has seen much goodwill and compromise between landlords and tenants and buyers and sellers as they work together to mutual benefit. This may have been done in a hurry; however, legal positions need to be regularised and put on a clear footing for the future. We may also see the courts considering whether COVID-19 is the genuine reason behind non-payment of rent rather than opportunism. Due diligence, timing and funding are, as ever, key to a successful transaction. There is a battle for flexibility versus certainty in many cases. Pragmatic solutions found to immediate problems may be storing up uncertainty in future. A focus on immediate issues does not eliminate the need to continue to comply with routine legal requirements.

For further information regarding the above matters, please contact Jeremy Stanton, Isabel Wightman-Cooper or another member of the Commercial Property team.