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How could commercial and residential properties be affected?

A pandemic such as COVID-19 will have various consequences for both owners and tenants of residential or commercial properties.  Key issues to consider are:

Property management and maintenance

  • Owners will need to communicate with property managers to create plans i.e. how the building will operate and whether enhanced cleaning is necessary.
  • Landlords may need to provide extensive deep cleans of buildings/common parts as recommended by heath guidelines. The costs of these fees may be passed onto the tenant depending on the wording in the lease and sweep up clauses in service charge provisions. There may be conflicts of opinion as to what is termed ‘reasonable’
  • For any projects requiring the landlord to carry out works, owners/developers/construction managers are encouraged to review the force majeure provisions in construction contracts. Building in a timing flexibility in the lease or other contract through a force majeure or similar clause may be prudent. It may also be useful to insert these into current transactions to include some flexibility in the timing of performance.

Buying and selling property

  • Sellers are encouraged to consider whether to disclose to a potential buyer that tenants have been diagnosed with COVID-19.
  • Advice should be sought in relation to reviewing loan documents to determine whether owners need to disclose building closures or suspected cases.

Protecting a property

  • Check insurance policies but these usually exclude coverage for losses related to bacteria, mould and other diseases. Whether coverage is provided will depend on the policy wording however it is unlikely that insurance policies will cover this business interruption.

Tenants and leases

  • Leases may include provisions permitting rent withholding if a landlord is not providing required services or the tenant cannot access its premises, but it is unlikely that a tenant will be able to claim a reduction in rent.
  • Tenants may look towards the doctrine of frustration if they cannot perform the obligations in a lease, but this is likely to only be temporary. Tenants may look to negotiating rental concessions or surrender of their lease.

Access to property

  • One scenario to consider is a potential lockdown with an inability to access the property. Leases usually contain provisions for tenants to comply with all laws but it remains to be determined whether health guidelines constitute as law
  • Keep open clauses also have the potential to cause dispute depending on governmental guidelines. At the moment, avoidance is recommended and there has been no forced closure of shops or other similar businesses. It is possible that keep-open clauses contain the exception that the tenant does not have to trade from the premises where it is unlawful to do so. Keep open clauses may also allow the tenant to close the premises with the landlord’s consent.
  • A landlord is likely to be in breach of covenant if they close their premises when they are not legally obliged to.

For advice on the above issues or any other property queries, please contact a member of the Property team

Our articles Covid-19 - FAQs for commercial tenants and Covid-19 and the Property Market will provide further insight.

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice

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