This article summarises some possible impacts of the COVID-19 pandemic on Scottish Real Estate sectors including Investment, Hospitality and Hotels, and Developments.
This article follows hot on the heels of our recent Real Estate finance articles 'Can the lender pull the loan?' and 'What to expect on the March Quarter Day' looking at the potential impact on the Real Estate finance market.
At Burges Salmon we have been closely monitoring the situation as it impacts on the Real Estate sector – particularly following renewed government advice and the recent UK wide lockdown. Our Real Estate department works in all the UK jurisdictions. This note is not exclusive to Scotland as many, if not all of the implications, affect UK Real Estate.
Investment Sector
The investment sector will be hit at a very basic level due to a reduction in transactional activity, a reduction in investors (home and overseas) and tenant default.
Specifically we are seeing activity with retailers approaching landlords for flexibility on payments of quarterly rents. Following the recent lockdown, retailers will be shutting down where they are not necessary services and this (despite the Government’s intervention last week with its package of help) will impact heavily on any company’s ability to generate income, and as such their ability to pay liabilities such as rent and service charge as a tenant. This has already resulted in tenants requesting a more flexible payment structure and more of this will certainly follow. For more information on the implications for tenants and landlords click here.
What we are seeing in England and Wales so far is the introduction of emergency legislation through the COVID bill to ban evictions for commercial tenants for at least three months. Whilst retailers will still approach the landlord for flexibility on the quarterly rent, the introduction of this emergency legislation will provide a ‘grace period’ where tenants would otherwise have been evicted. It is not a rent holiday; landlords are still owed rent and, should this not be paid once the legislative period has lapsed, will be able to claim forfeiture in England and Wales. This approach encourages businesses that are in a position to make their rent payment to do so, while providing three months’ grace to those that are struggling.
It remains to be seen whether this will be replicated in Scotland but we assume that something similar will be introduced imminently to provide some clarity prior to the next rent payment date at the end of May.
Hospitality and Hotels
We have already seen a huge decrease in the occupancy levels of hotels throughout the world and the UK wide lockdown will likely result in occupancy levels of virtually zero. Hotels are having to shut or to 'mothball' for a period of time and the implications of this are wide ranging across the UK and are not alone to Scotland. There will be staffing issues to be considered in such circumstances with a likely increase in redundancies or staff being asked to take temporary leave. This will also have a huge effect on suppliers and, like other businesses that are structured on a lease or other occupancy agreements, hotel tenants will be approaching landlords for flexibility in relation to rent payments.
Businesses will also be in negotiations with their insurance companies with many policies unlikely to cover closure as a result of COVID-19.
Developments
It is likely development sites will be closed down, with First Minister Nicola Sturgeon calling on Monday for Scottish building sites to shut to save lives. This will have an impact on the workforce but also on timeframes that are indicated in building contracts and agreements for lease. Amongst other things this raises the question of force majeure clauses and their liability and implication. In both Scots and English law the answer on whether force majeure applies depends on the set of circumstances and the contract to which it applies. There is no Scottish case law surrounding pandemics and force majeure, individual contracts will therefore have to be examined to work out whether the definition is extensive enough or far-reaching enough to cover COVID-19 or a pandemic. If the definition includes an exhaustive list then there may be difficulties in making that argument but given this is an unprecedented set of circumstances a court may take a wider interpretation of the wording.
Registers of Scotland
The current situation also leaves a question mark over whether the standard post completion admin will be interrupted. Registers of Scotland have just announced that they will not be taking paper applications after 24 March. As online submission to ROS is not available for the majority of transactions there will therefore be a suspension of the application record and a temporary freeze on completing the registration process in Scotland. Registers of Scotland are working on a digital solution and will provide an update on their proposed solution on Friday 27 March – which may include seeking emergency legislation to extend the protective period afforded by Advances Notices – but this will undoubtedly have an effect on transactions due to complete imminently.
Going Forward
As with anything at the moment great uncertainty remains with the COVID-19 pandemic. We are keen to assist and our team of experts in Real Estate across all the sectors are on hand to do so.
For more information please contact Robert Forman or Claire MacLean.