The imposition of a nationwide lockdown is likely to impact on the ability of estates, or the businesses/individuals interacting with those estates, to meet their contractual obligations. Suppliers may assert that they are unable to fulfil deliveries or carry out planned works, or estates may be grappling with cancelled holiday lets, for example.
Under English and Welsh Law there are several key issues which could arise in relation to contracts and we set out some of the key ones below. However, the COVID-19 pandemic is (and the steps which governments are taking in the UK and worldwide are) unprecedented. It is therefore possible that the Courts will in the future take an approach which differs from the current position as a result of the pandemic.
Checking the force majeure clause in your contract
Force majeure has no defined concept in law. It is merely used as a label to refer to clauses that excuse a party from performing their contractual obligations where that performance is significantly affected by events outside of their control, such as natural disasters or war.
It is a common misconception that the outbreak of COVID-19 and/ or the precautionary steps required by the UK Government to reduce the transmission of the disease are force majeure events. They may be, but that is not automatically the case.
Whether COVID-19 (or any other event) amounts to a force majeure event will depend in every case on the precise wording of the contractual terms agreed between the parties, alongside consideration of the particular nature of the contract concerned.
Many force majeure clauses will include a list of specific events that the parties have agreed will amount to force majeure, entitling the parties to cease performing some or all of their obligations under the contract. Whether COVID-19, or any other pandemic/illness, is included will depend on the particular wording of the clause.
In addition to a specific list of events, a force majeure clause may also include ‘sweep-up’ wording along the lines of ‘events of a similar nature to those listed’. Whether events arising because of COVID-19 will be of ‘a similar nature’ to the events listed will be a question of fact based on the surrounding wording of the contract. For example, events arising because of COVID-19 will not usually be ‘of a similar nature’ to those arising from fire or flood.
Does your contract refer to ‘Acts of God’?
Some contracts include references to ‘Acts of God’. Sometimes this is defined by reference to specific events or types of events, and sometimes not.
Where it is undefined, the term has been interpreted by the Courts as amounting to ‘extraordinary’ incidents which occur due to natural causes, without human intervention, and which could not have been foreseen.
This has generally included natural disasters, such as earthquakes and floods, but it is possible that it could include a pandemic (including COVID-19); assuming the wording of the contract itself supports this.
However, the position for COVID-19 is currently untested and it should not be assumed that the Courts will conclude that COVID-19 falls within the scope of this term. It is too early to draw a firm conclusion on what might be determined about the cause of the pandemic and the extent to which it could have been foreseen.
Impact of force majeure
The impact of a force majeure event is often dealt with in the contract itself and again varies on a case-by-case basis. Sometimes the wording of the contract may excuse non-performance of all of a party’s contractual obligations. Alternatively, it may limit its effect to certain specified obligations, or may simply delay or extend the period to perform those obligations.
It is important to note that the contract may also contain specific procedures that must be followed if a party wishes to rely upon a force majeure event. These can include specific notice requirements or other steps a party is obliged to take. If such a provision exists, a party wishing to rely on a force majeure event must ensure that it follows the correct procedure or risk losing the right to rely upon force majeure to excuse performance of their obligations.
Frustration – a potential alternative to force majeure
A contract is ‘frustrated’ when it becomes impossible to perform. If a contract does not contain any terms dealing with force majeure, a party might be able to assert that the contract has been frustrated because it is impossible to perform its obligations, or that performance would be radically different to what was agreed.
There is a very high bar to proving that a contract has been frustrated.
It is not enough for a party to rely on frustration simply because it has become commercially undesirable for it to perform its contractual obligations.
Where a contract is frustrated the parties will be discharged from their future obligations.
Illegality – could performance of your contractual obligations go against Government imposed restrictions?
Where obligations under a contract result in an outcome which goes against Government imposed restrictions, contracting parties may seek to rely on ‘illegality’ to excuse non-performance. Again, it is a high bar to prove that performance of a contract is illegal. The Courts start from a presumption that a contract is lawful and will prefer to construe it in such a way.
It is possible, however, that this argument may become increasingly relevant to a range of contracts following the recent Government imposed lockdown. The requirement for certain businesses to close, restrictions on the movement of individuals, the advice to limit ‘unnecessary’ travel and the banning of holiday lets, weddings and other events and gatherings could lead to claims that contractual performance would be illegal. Given the Courts’ case-by-case approach in this area, it is vital to consider the precise wording and scope of parties’ contractual obligations before taking decisive steps.
Insurance
It is sensible to consider what insurance policies estates have in place. There may be policies that potentially cover losses suffered because of COVID-19. As with all other contracts, however, the question of whether cover is provided in relation to COVID-19 will come down to the particular policy wording and any specified exclusions.
It is also important to check what notification requirements there are under any insurance policies - these will usually require the insured to notify the insurer of a claim, or potential claim, within a specified time. Consequently, even if it is unclear at this stage whether an estate may seek to rely on a policy, or whether COVID-19 related issues are covered, it may be advisable to notify an insurer of a potential claim at this stage.
Commercial tenancies
The Coronavirus Act 2020 (the Act) has introduced restrictions on a landlord’s right to forfeit commercial leases for non-payment of rent for a period up to 30 June 2020, although this period can be extended by the Government. Any right to forfeit for non-payment is therefore frozen until that period expires.
These changes do not restrict a landlord’s right to seek other enforcement remedies against a tenant for non-payment of rent (including, for example, Commercial Rent Arrears Recovery and service of a statutory demand and/or winding up petition) nor does it restrict a landlord’s right to forfeit a business lease for other breaches of the terms of the tenancy agreement.
During this time, landlords will not lose (or waive) their right to subsequently rely on a tenant’s failure to pay rent to forfeit the lease if they fail to take the usual steps required when relying on forfeiture. However, this does not apply if the landlord wishes to rely on forfeiture rights for other breaches of a lease, so it is wise to be clear about what steps have or have not been taken and ensure records are kept.
The changes introduced by the Act will be relevant to any business leases on rural estates, but they do not apply to agricultural tenancies or to any licences.
Residential tenancies
From 26 March to 30 September 2020 the Act has extended the notice period needed to terminate most residential tenancies to three months. That applies to ASTs, assured tenancies and assured agricultural occupancies (AAOs) and to Rent Act 1977 tenancies (both protected and statutory). In the case of assured tenancies, AAOs and Rent Act tenancies the usual grounds for possession would also have to be made out. The Act gives the Secretary of State the power to increase the three month notice period to up to six months.
From 27 March 2020, all possession proceedings have been stayed for 90 days so no possession proceedings can currently progress, nor can enforcement action (to enforce an order for possession by a warrant or writ of possession) proceed. This change is in effect until 30 October 2020.
The extension of notice periods in the Coronavirus Act 2020 does not apply to Protected Occupancies under the Rent (Agriculture) Act 1976, or to common law tenancies. Those will, however, still be subject to the 90 day stay.
Employees
The Covid-19 pandemic has had an unprecedented impact on workforces and guidance is being issued on an almost daily basis. In summary, however, there are a number of key issues that employers should consider and we set these out below.
Employers should make every attempt to enable their employees to work from home and employees should only attend their work place if their work cannot be done from home.
If employees need to attend work, employers are under a duty to take reasonable steps and should follow the government’s published guidance which is designed to help businesses stay open where they are allowed to do so, whilst protecting their workface.
Particular care should be taken in relation to vulnerable employees (e.g. those who are pregnant) or employees who are shielding by following the Government’s guidance. Small employers can recover up to 14 days’ statutory sick pay if an employee is off sick.
If it is necessary for employees to reduce their hours because there is less work for them to do, this will need to be agreed the employee, unless the employer is already authorised to reduce their hours under the contract of employment.
If there is no work at all for an employee, it might be possible to agree with the employee that they will be ‘furloughed’. This will allow the employer to recover 80% of the employee’s monthly salary (subject to a max of £2,500), together with employer NICs and minimum pensions contributions under the Coronavirus Job Retention Scheme.
Employers may also wish to think about asking employees to take paid holiday to avoid an employee having a large amount of accrued untaken holiday later in the year.
Additional steps to take
The situation around COVID-19 is rapidly evolving. It is important to keep up-to-date with guidance and maintain clear records.
If you are engaging in discussions with other contracting parties, insurers, tenants, or employees to manage the situation, ensure you keep a clear written record of any conversations. It is helpful to summarise any oral communications you have in a follow up email, for example, which can then act as a written, timed, record of any agreed arrangements.
Keep detailed and contemporaneous records of the impact that COVID-19 is having on the operation of your business and/or the management of the estate as these may be helpful at a later date.
Be aware of the latest UK Government guidance by monitoring the Government website here.
If you would like further guidance or information on any of the above, we would be happy to help.