The government has published its coronavirus COVID-19 action plan, which recognises the virus as a "significant challenge for the entire world." Although a lot is yet unknown about the virus, the World Health Organisation declared it a public health emergency of international concern. The situation is rapidly evolving and businesses must consider their position and the potential impact of coronavirus COVID-19.
On 23 March 2020, the UK government introduced three new measures:
- closing non-essential shops and community spaces
- requiring people to stay at home, except for very limited purposes
- stopping all gatherings of more than two people in public
These measures were effective immediately and the relevant authorities, including the police, have been given the powers to enforce these measures – including through fines and dispersing gatherings.
More detailed information regarding the closure of all non-essential premises can be found here, including a full list of those businesses and other venues that must close. Businesses and other venues not on this list may remain open, but nonetheless must operate in accordance with this advice. The government confirmed that it would keep all measures under review.
In its first major review on 10 May 2020 the UK government announced changes for England to some of the lock-down measures introduced on 23 March 2020. Anyone who cannot work from home is encouraged to go to work (such as those in construction or manufacturing), but avoid public transport where possible. The government has published guidance for employers, employees and the self-employed on how to work safely during Covid-19. There are eight different guides covering a range of different types of workplace.
Non-essential shops and community spaces should remain closed for now, but the government envisages that, after 1 June at the earliest, the phased re-opening of shops may begin (depending upon the infection rate at that time). As a third stage, from July at the earliest, it is hoped that some hospitality and other public places may be able to re-open if they are safe and social distancing can be observed. The more stringent measures announced on 23 March remain in place outside of England.
Scotland has introduced its own regulations and guidance which implement similar measures to those introduced by the UK government on 23 March. Guidance on the Scottish measures can be found here.
In this article, we highlight some issues that may arise from a UK real estate perspective and provide some practical guidance. The situation is in flux, so it is important to keep up to date with advice published by the government and regulatory agencies, particularly if the virus itself mutates, a real concern expressed by the WHO from past experience of similar outbreaks.
This note is not intended to be all encompassing; nor does it constitute legal advice. Please get in touch with your usual DLA Piper contact if you require more specific advice on any query, whether on real estate matters or any wider business issues. We have a dedicated team addressing enquiries for our real estate clients.
Landlord and tenant considerations
If a tenant is unable to occupy, what are the legal consequences?
Most standard commercial leases include an obligation on the tenant to comply with all statutes and notices or orders made by competent authorities. As a result, a tenant would be in breach of that covenant if they fail to comply with any clear directions issued by the UK government, such as the closing of offices or asking staff to work at home to contain the spread of coronavirus COVID-19. Landlords similarly, as an employer, must comply – essentially everyone is in the same boat, so working collaboratively together is best practice.
Force majeure and the law of frustration: Leases generally do not contain force majeure clauses allowing parties to end the lease, unlike development agreements or construction contracts, which often do. Instead, if prevented from occupying their premises, tenants may look to the doctrine of frustration to see if that can help get them out of their lease obligations. However, frustration is a high bar: a contract will be frustrated if an event occurs that renders it impossible to perform an obligation or the obligation is radically different to that originally envisaged when the contract was made. There are no reported cases in England where a lease has been held to be frustrated. In the context of coronavirus COVID-19 in England, it therefore seems unlikely (at present) that a tenant could successfully argue that its lease has been frustrated, particularly if any period during which it is unable to occupy the premises is only temporary (which seems the likely scenario at the moment).
But the potential frustration of a lease should not be discounted. There is an increasing line of thought that, as the current situation continues, there may be scope for frustration arguments where:
- there is a short term of the lease remaining;
- the user provisions are restricted; and
- there is an inability to assign or sublet the balance of the lease term due to lack of market demand.
This will depend on the specific provisions of the lease. Advice should be sought, as a threat of frustration (without merit) by a party to a lease may be seen as a repudiation or a rejection of the lease contract entitling the other party to rescind or end the lease contract and claim damages for the repudiatory lease breach.
(In Scotland the courts have stated that the law of frustration is essentially the same as in England, although there have been instances (albeit few in number) where Scottish courts have held that leases have been terminated by frustration.)
Withholding of rent / forfeiture: Most leases do not allow the tenant to withhold rent regardless of the circumstances. To withhold rent would ordinarily expose a tenant to the risk that a landlord could peaceably re-enter the premises without notice (known in legal terms as forfeiture) and take possession of the premises without court action by changing the locks, effectively ending the lease – although relief from the courts could be sought and would be available to tenants if they paid arrears plus the landlord’s costs. In Scotland, a tenant cannot be lawfully removed from premises (and the landlord cannot change the locks) without a court order.
The Coronavirus Act 2020, which became law on 25 March, has suspended a landlord’s ability to take forfeiture action for business tenancies (as defined by the Landlord and Tenant Act 1954) in England and Wales, so that business tenants who cannot pay their rent (which is defined to include all sums payable under a lease) will be protected from forfeiture. These measures, effective from 26 March 2020, mean no business tenant can be forced from their premises if they miss a payment in the next three months (ending on 30 June 2020 – a date capable of being extended by the government). Equally, during this period, no action by a landlord (other than giving an express waiver in writing) will be regarded as waiving a right of re-entry or forfeiture for non-payment of rent.
The UK government says it is actively monitoring the impact on commercial landlords’ cashflow and will continue to be in dialogue with them. This “suspension” period can also be extended, so landlords and tenants must monitor the situation.
The Coronavirus Act 2020 merely suspends a landlord’s ability to forfeit a lease during the suspension period. It does not prevent rent and other sums due under the lease from accruing. These sums, and interest, remain the liability of the tenant, so the Act merely offers breathing space for tenants. It does not waive the tenant’s liability to pay.
These suspension provisions are not thought to give protection to those occupying premises pursuant to licences, commercial contracts or other arrangements – whether or not this was intended by the government. However, the title given to a document is not necessarily how it will be construed in legal terms, and licences often constitute business tenancies if (in simple terms) they afford an occupier exclusive possession of a space for a term at a rent (or something akin to rent, however expressed). This issue can often be the subject of complex argument and each arrangement has to be considered in accordance with its terms and how the terms are in reality applied, as between the parties to any arrangement.
(In Scotland, the Coronavirus (Scotland) Act 2020 (the “Scottish Act”) was passed on 1 April and came into force on 7 April. The purpose of the Scottish Act is to complement measures already implemented in the UK-wide Act.
The majority of provisions in the Scottish Act will automatically expire six months after coming into force. They may be extended for two further periods of six months, giving a maximum duration of 18 months.
The Scottish Act introduces a moratorium on irritancy (the Scottish equivalent of forfeiture) by lengthening (from 14 days to 14 weeks) the minimum period of notice which a landlord must give to a business tenant to pay arrears of rent (or other payments due under a lease) before the landlord can initiate court proceedings to terminate the lease for non-payment. As is the case with forfeiture under the Coronavirus Act 2020, the Scottish moratorium does not apply to delay irritancy where the ground for irritancy is the tenant's breach of a non-monetary obligation in the lease.)
Though the Coronavirus Act 2020 suspended the landlord's right to take forfeiture action for non-payment of rent, it did not limit a landlord’s ability to take other types of enforcement action. Most notably, it did not affect a landlord’s ability to use the Commercial Rent Arrears Recovery procedure (known as as CRAR) or prevent a landlord from issuing statutory demands or winding-up petitions for rental or other payments due under leases.
On 23 April 2020, the government announced its intention “to introduce temporary new measures to safeguard the UK high street against aggressive debt recovery actions during the coronavirus pandemic.”
The Business Secretary Alok Sharma announced that the government will temporarily ban the use of statutory demands and winding-up orders where a company cannot pay its bills due to coronavirus, to ensure it does not fall into deeper financial trouble. The measures will be included in the Corporate Insolvency and Governance Bill, which Sharma set out earlier in April. This is expected to go before Parliament any day now. By a subsequent update on 25April, the government announced the temporary ban of the use of statutory demands (made between 1 March 2020 and 30 June 2020) and winding-up petitions presented from Monday 27 April through to 30 June, where a company cannot pay its bills due to coronavirus.
(Although it seems likely that these measures will be introduced in Scotland, it is not yet known whether doing so will require subordinate legislation, but this should become apparent when the Bill is introduced.)
The government is also introducing secondary legislation to provide tenants with more breathing space to pay rent by preventing landlords using the CRAR procedure unless they are owed 90 days of unpaid rent.
(So far, no announcement has been made on whether there are plans to amend the rules on summary diligence (the Scottish equivalent to the CRAR procedure) whereby officers of the court have power serve a charge for payment and then on expiry of the charge to attach goods and money in the property in order to recover unpaid rent.)
Though landlords are urged to give their tenants breathing space, the government is asking tenants to pay rent – or at least part of it – where they can afford it in recognition of the strains felt by commercial landlords. We suspect this will be of little comfort to landlords severely impacted by non-payment of rent by tenants on the March quarter day (25 March 2020), and they will be looking ahead to what will happen on the June quarter day (24 June 2020) and beyond regarding their own debt and liabilities under their banking and finance covenants. (Note: In Scotland the quarter days are 28 February, 28 May, 28 August and 28 November.)
Several landlords in different sectors have written to Chancellor Rishi Sunak urging action to implement a rent-support scheme working in tandem with the economic relief packages already available. This proposed scheme (referred to as the Furloughed Space Grant Scheme) would see a proportion of a business’s property costs covered by the government, similar to the model introduced in countries like Denmark and Sweden, with a view to keeping a healthy property ecosystem. It remains to be seen whether the government will act on this proposal.
The Coronavirus Act 2020 applies only to business tenants. The 23 April announcement refers to “high street shops and other companies under strain.” This raises several questions:
- Is the legislation proposed by the announcement intended to apply to a broader section of occupiers “under strain” beyond business tenants as we understand this term by reference to the Landlord and Tenant Act 1954 as reflected in the Coronavirus Act 2020?
- What is meant by “aggressive debt recovery actions”?
- Does this go beyond the use of CRAR, statutory demands and winding-up petitions to include any perceived “aggressive” action? For example, a landlord agreeing a rent concession in exchange for an acceptance by a tenant or some other restrictive provision applying to the landlord and tenant relationship in exchange?
The government announcement also says: “Under these measures, any winding-up petition that claims that the company is unable to pay its debts must first be reviewed by the court to determine why. The law will not permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of COVID-19.” Again, this raises several questions:
- How will the courts test this?
- How will tenants evidence that their inability to pay is solely a result of COVID–19, when it could be said that the high street (and other businesses) were already in difficulties before this crisis?
- When the legislation is implemented, what tools (if any) will a landlord have to force its tenants to pay rent?
- What will landlords be thinking now during this period of uncertainty, and how will these measures affect the landlord and tenant relationship in future?
We will provide updates on these issues as soon as we are able to.
Rent concessions: A number of tenants are approaching their landlords with proposals for sharing the rental risk and reaching voluntary arrangements about rental payments due imminently. We are advising both landlords and tenants on these arrangements, so please get in touch with your usual DLA Piper contact if you would like such assistance. In particular, we are ready to assist in drafting or responding to requests/offers for rental concessions.
Tenants may request a reduction in rent or a re-gearing of the lease terms to take the pandemic into account. However, there is nothing in either English or Scots law that would require the landlord impliedly to act in good faith and entertain that request in a commercial lease scenario. This is evolving case-law when it comes to pure commercial contracts. Although there may be reputational and commercial pressure to renegotiate lease terms, there is no absolute legal obligation on landlords to do so, but it may be in their interests to come to some accommodation with tenants.
When considering rent concessions, parties may agree that landlords can draw down on rent deposit funds to alleviate tenants’ cashflow issues. Appropriate provisions extending the date by which the account has to be topped up would need to be included.
Any accommodation should be reflected in a letter in clear terms reflecting what has been agreed and should include provisions requiring any government assistance given to the tenant to be declared to the landlord with reimbursement to be made where relevant. As you will see from our other real estate publications, we have developed a rent concession letter tool to help landlords and tenants document any concessions.
The government issued further guidance on 7 May 2020 encouraging parties to contracts in England (in both the public and private sectors) to act responsibly and fairly in performing and enforcing contracts where there has been a material impact from COVID-19. Parties are encouraged to be reasonable and proportionate in responding to performance issues and enforcing contracts, to act in a spirit of co-operation and aim to achieve practical, just and equitable outcomes. This guidance is non-statutory but the government “strongly encourages” parties to follow it for their collective benefit and the long-term benefit of the UK economy.
Insurance: Tenants in most cases pay an insurance premium to their landlords for insurance coverage from certain insured risks, which will vary from lease to lease. Most leases entitle tenants to ask their landlord for a copy of the insurance policy to enable them to check the position. If the definition of insured risks in a lease is wide enough to cover the pandemic, there may be a clause in the lease that entitles the tenant to a rent suspension, by following a strict procedure set out in the lease. However, in the majority of insurance policies, the pandemic is unlikely to be classified as an insured risk, so the terms of each policy must be checked.
Business interruption insurance is another possibility. But it is unlikely tenants will have a policy that will cover this scenario. Tenants may have procured business interruption policies, but these will usually be linked to property damage. Non-damage business interruption cover (which might cover the impact of a pandemic) is available in the insurance market, but not commonly bought. Coronavirus has now been declared a "notifiable disease" in England, Scotland and Northern Ireland. This is a formal classification required by many insurance policies, so those who have business interruption cover may now be able to claim under it, depending on the specific terms of their policy.
Keep-open clauses in leases: Retail and other tenants with keep-open covenants in their leases will need to consider the impact of closing their outlet where necessary. Depending on the provisions of the lease and the government's official guidelines and rules at any given time, keep-open clauses have the potential to cause disputes between landlord and tenant.
As above, most UK commercial leases will contain an obligation on the tenant to comply with statute. The tenant would be in breach of covenant if it fails to comply with any clear direction issued by the government, such as the closing of premises.
It is well established in England and Wales that only in the most exceptional cases will the courts enforce keep-open covenants by ordering specific performance. Though landlords are theoretically able to claim damages if a tenant breaches its keep-open covenant, it will be difficult for a landlord to substantiate its loss. It is particularly difficult if there are no turnover rent provisions in the lease. For example, how do you value a drop in footfall?
The treatment of keep-open clauses in Scotland is different to that in England and Wales. The remedy available for a landlord is "specific implement." This is a court declarator obliging the tenant to re-open the premises and recommence trading. Whereas in England specific performance is an equitable remedy that will only be granted in exceptional cases, in Scotland specific implement is a legal right that will only rarely be refused on equitable grounds.
We expect that a court in England or Scotland would view the compliance-with-statute clause as taking precedence over the keep-open provisions in the lease. If a landlord forced the closure of premises as a result of government mandate or took a decision to do so on reasonable grounds even where the nature of the property was not identified by the government on a list for mandated closure, it is difficult to see how they could be criticised or held in breach of the express or implied covenant for quiet enjoyment when their actions are “lawful” – but in each case the exact terms of the quiet enjoyment covenant would warrant a close interrogation.
Use of premises as takeaways: Following the closure of pubs and restaurants after 20 March 2020, the UK government has also announced its position on the use of these premises to provide takeaway food. Legal advice should be obtained to confirm the position; please get in touch with your usual DLA Piper contact for help.
Premises in England: Hot food takeaways in England fall within Use Class A5. A change of use from a pub or restaurant to a hot food takeaway will normally require planning permission. Cold food takeaways are normally within Use Class A1 (which also covers most other retail uses). It is possible for a restaurant or café normally used for the sale of food for consumption on the premises to change to class A1 under a "permitted development right," but this only applies in one direction. In other words, the switch back will normally need planning permission.
A new permitted development right has been introduced to give greater flexibility for food and drink businesses that have been required to close to allow for the provision of takeaway food where the current use falls into one of the following categories: (i) Use Class A3 (restaurants and cafes); (ii) Use Class A4 (drinking establishments such as pubs); (iii) a mixed use combining Class A3 and Class A4; or (iv) a use as a drinking establishment with expanded food provision.
This new right applies to the provision of both hot and cold food for consumption off the premises and applies for a temporary period from 24 March 2020 until 23 March 2021. This is subject to conditions that the local planning authority must be notified and the property must revert to its previous lawful use at the end of the period. It is possible for the exercise of this new right to be precluded by a planning condition affecting the property. This should be checked beforehand to ensure the risk of planning enforcement action is reduced.
Tenants will still need to comply with any use restrictions set out in the lease unless agreement can be reached with the landlord to deviate from them. However, the new regulations provide that use of this new right does not affect the use class which the property had before the change of use to a takeaway begins. Depending on the drafting of the user clause in the lease, tenants may have flexibility to change the use of the premises without landlord consent.
A separate licence may also be required if hot food and drink is to be supplied during certain hours (generally, from 11pm until 5am the morning after). If a licence is required, then trading without one may constitute a criminal offence and could also put tenants in breach of their lease.
Premises in Wales: Pubs and restaurants in Wales normally fall into Use Class A3. Use of a property as a hot food takeaway also falls in this class. As such a change of use will not normally need planning permission. Similarly, the change back will not normally need planning permission. If a change to a takeaway selling cold food only is proposed, this would entail a switch to Use Class A1 (which covers most shops and retail premises). Planning permission is not normally required to switch from Use Class A3 to Use Class A1, but the reverse (A1 back to A3) would require planning permission, as relaxation only works in one direction.
The above types of change may be precluded by a planning condition or a direction made by the local council, and tenants must still comply with any use restrictions set out in the lease unless agreement can be reached with the landlord.
Again, a separate licence may also be required if hot food and drink is to be supplied during certain hours (generally, from 11pm until 5am the morning after).
Premises in Scotland: The Chief Planner of Scotland has written to local planning authorities with the advice that the Scottish government does not expect enforcement action to be undertaken that would unnecessarily restrict public houses and restaurants from providing takeaway services on a temporary basis during the current outbreak. If unacceptable amenity issues arise which would warrant investigation, the local authorities are required to take account of the impact that the use of enforcement powers would have on the individual businesses concerned. This advice will be reviewed in three months.
Health and safety: In almost all cases, it will be for the tenant to consider any threat to the health and safety of its employees, as health and safety law states that organisations must:
- assess risks to employees, customers, partners and any other people who could be affected by their activities;
- arrange for the effective planning, organisation, control, monitoring and review of preventive and protective measures;
- ensure they have access to competent health and safety advice; and
- consult employees about their risks at work and current preventive and protective measures.
Landlords who are employers will also have duties to their staff and others regarding risks posed from infectious diseases. Failure to comply with these requirements can have serious consequences – for both organisations and individuals.
Landlords may also have responsibilities to the extent that they exercise relevant control over parts of premises (and their ability to implement measures). Taking legionella as an example, the law imposes a duty on relevant persons to assess and address legionella risks at a property. Such a duty may rest with landlords, as legionella is a bacteria which can proliferate (such that it can pose a risk of causing ill-health) in the water systems of a building, and addressing water quality and contributory risk factors is usually something that the landlord (as opposed to a tenant) can control. This is different to the situation with coronavirus COVID-19, as it appears that it is not the construction of the building or management of the infrastructure that has an effect on the spreading of the virus. Rather, it is passed human to human, and is not linked to buildings or their infrastructure – at least in its current mutation.
In terms of specific health and safety regulations, a landlord has no explicit obligations at law regarding the prevention or containment of coronavirus COVID-19 in its premises. The virus is, however, a biological agent, so the Control of Substances Hazardous to Health Regulations 2002 (COSHH) may be relevant, as they provide a framework to control the risks from a range of hazardous substances. Whether such obligations towards tenants exist under COSHH largely depends on the level of control a landlord has over the property, which will itself be determined both by the terms of the leases granted and the physical characteristics of the property.
For example, if a landlord has granted a long lease of the whole of a building and has no ongoing maintenance or services obligations towards its tenant, then the landlord is unlikely to have any responsibility under the regulations. If, however, a landlord has granted a lease of just one floor in a multi-let office block, with shared air conditioning and other common services and areas, and it retains responsibility for maintaining and providing them, its obligations may be more extensive.
If a landlord does have obligations under COSHH or other health and safety legislation regarding the premises it lets, it should assess the risks of coronavirus COVID-19 and may need to take preventative measures (e.g. more frequent cleaning of lavatories, eating areas, door handles and hand rails). In a confirmed case of coronavirus COVID-19, however, measures will primarily be dictated by Public Health England (PHE) or Health Protection Scotland (HPS), and following these will be the best way to comply with health and safety obligations. Indeed, regardless of the diagnosis of a case of coronavirus COVID-19, guidance from PHE, HPS or the government should be followed in relation to cleaning and so on (to the extent that this is the landlord's responsibility under contractual provisions). Care should be taken to ensure that, for example, suitable handwashing facilities are available if these are part of the landlord's responsibilities under the lease. Landlords must also ensure that they keep up to date with PHE, HPS and government advice.
As we mention above, on 11 May, the government published guidance for employers, employees and the self-employed on how to work safely during COVID-19.
Occupier's liability: Provided a landlord in control of all or any part of the premises takes all reasonable steps to protect the safety of those invited and uninvited entering the building or premises (and can evidence that reasonable steps have been taken), it is unlikely that any additional liabilities will result from this legislation. Reasonable steps in this context would be complying with advice given by PHE or HPS as it changes from time to time.
Landlord's ability to recover costs of enhanced cleaning and regulatory compliance
Though there is currently no explicit legal obligation on commercial landlords to provide extra cleaning services to prevent coronavirus COVID-19 spreading in their premises, many are taking pragmatic steps. In particular, commercial landlords responsible for common parts are providing more frequent and thorough cleansing of those common parts, particularly frequently touched surfaces (e.g. door handles, elevator buttons and toilets). Supplying these extra cleaning services will have cost implications, and commercial landlords should check the service-charge provisions in their leases to ensure such charges are recoverable.
Most service-charge provisions contain a sweep-up provision allowing the landlord to recover reasonable costs incurred in line with the principles of good estate management. Some service-charge provisions will also allow costs incurred as a result of complying with "applicable laws" to be recovered – although whether a landlord can rely on this type of provision will depend on whether the government imposes prescriptive measures. In each case, the recoverability of a landlord's costs for such enhanced cleaning measures would be subject to any tenant-negotiated service-charge cap or specific exclusions in the list of services contained in the lease.
Arguments may arise as to whether the landlord is required to provide certain services (whether by contract or by law) and, where the landlord has discretion to carry out services, whether that discretion is exercised in accordance with the contractual provisions.
Further arguments could arise on the interpretation of what constitute reasonable costs. For example, if coronavirus COVID-19 becomes more widespread, would providing a hand sanitiser to every occupier that comes onto the premises be a cost that is recoverable as service charge or otherwise?
Wider regulatory issues regarding any steps taken (such as cleaning or surface disinfection) by a commercial landlord or its managing agents should also be considered. For example, a planning permission for commercial premises will often contain conditions that restrict or limit the hours during which servicing may take place. This could possibly catch enhanced or additional cleaning activities, for example, if additional rubbish clearance is required or additional traffic and noise is caused.
Planning authorities have power to take enforcement action if activities are carried out in breach of a planning condition, and often will if disturbance is caused to neighbouring occupiers. Those responsible for building or premises management should, therefore, check for restrictions on servicing or access arrangements and ensure that, wherever possible, enhanced measures are carried out in compliance with them. This may mean scheduling work at specific times, and could require more detailed collaboration with tenants and occupiers. However, Ministers in England, Wales and Scotland have advised planning authorities to limit enforcement action where possible against, for example, deliveries (including those to supermarkets) outside times set in planning conditions during the outbreak.
Land registration in Scotland
Previously, the Land Register of Scotland and did not permit scans of signed paper deeds to be submitted for registration. As a result of the COVID-19 outbreak, the application record of the Land Register closed from 24 March, save for emergency transactions. This has resulted in a number of commercial and lending transactions being put on hold.
The Scottish Act amends existing legislation in order to introduce temporary measures to permit the submission to the Land Register of a scanned copy of a signed paper deed by electronic means. These measures came into effect on 27 April.
The applicability of force majeure clauses in construction contracts
Coronavirus COVID-19 is already affecting engineering, fabrication and procurement contracts that contemplate inputs of labour, services and goods from affected regions.
Many international and domestic construction contracts contain force majeure clauses to give relief in these circumstances. The purpose of a force majeure clause is to avoid the legal and commercial uncertainty of events that would otherwise frustrate the performance of the contract and that were not contemplated when the parties entered into the contract.
It is possible that if you have such a clause in a contract it will cover the current coronavirus COVID-19 situation. Contracts vary, however, and the operation of the force majeure clause may differ in each case; specific legal advice should be sought.
Under the JCT form of contract, force majeure is a "relevant event" entitling the contractor to claim additional time for completion of the works, but it is not a "relevant matter" that would allow the contractor to claim loss and expense. Force majeure is not defined in the JCT contract, but the current coronavirus COVID-19 situation is likely to be considered such an event.
The NEC contract provides that an event that stops the contractor from completing the works may be a compensation event entitling the contractor to additional time and money. Such an event must be one that neither party could prevent, and that the contractor would have judged at the start of the contract to have such a small chance of occurring that it would have been unreasonable to have allowed for it. This would cover any events – whether disruptions to supply chains and labour resources, or government action – that prevent the contractor from completing the works. This provision can be relied on by contractors who entered into contracts before the outbreak of the virus, but possibly not for contracts entered into after the outbreak, if the impact is something the contractor could reasonably have made allowance for.
Following the UK government’s new measures on 23 March 2020 to force people to stay at home, and subsequent clarification that construction sites might only stay open if social distancing guidance could be observed, many construction sites closed. Subsequent sector specific guidance issued by the government on 7 April 2020 makes it clear that construction sites may remain open, providing they observe social distancing wherever possible. Practical guidance in relation to observing social distancing in the context of a construction site has been issued in the form of the Construction Leadership Council’s (CLC’s) Site Operating Procedures (SOP). Version 3 of this document was issued on 15 April 2020 in response to the government’s sector guidance; this makes it clear that contractors must still comply with existing health and safety requirements, in addition to the sector specific guidance.
For those projects where sites must close, contractors will, in most cases, be entitled to an extension of time if the contract contains force majeure-type provisions of the type noted above. Whether the works should continue will be a matter for discussion between the employer and the contractor, having regard to the practical advice contained in the SOP and the obligations of both parties to maintain the health and safety of employees both under the Health and Safety at Work Act 1974 and the Construction (Design and Management) Regulations 2015. Some housebuilders are now re-opening sites, after having developed and tested a new range of site protocols to enable social distancing to be enforced. The parties will need to ensure that those sites that remain closed areleft in a safe and secure condition, and that insurance is maintained.
(Note: On 6 April 2020, the Scottish government issued guidance to the construction industry that construction work in non-essential sectors (the definition of which includes domestic housing, office buildings and other commercial properties, leisure and retail) should cease in Scotland until further notice. The guidance states that construction work may continue only on "essential" projects, and only then where social distancing and health and safety guidance may be complied with. Essential projects include:
- those to create or repurpose facilities that will be used directly in COVID-19-related activities;
- projects to create or repurpose facilities that will be used to accommodate key workers, or free up space in facilities to be used directly in COVID-19-related activities;
- projects that are considered essential public services; and
- the repair and maintenance of critical infrastructure.
On 21 April Scottish social distancing regulations were extended to cover all workplaces, including construction sites.
An updated version was issued on 1 May 2020 and the guidance continues to be that non-essential construction work should not be carried out.)
What about contracts being negotiated now? Force majeure-type provisions may not be of assistance in contracts being agreed at the moment, depending on how the provisions are drafted, because the existence of coronavirus COVID-19 is known, although the full impact and likely duration of measures in response to it are not, and may be beyond the control of either party.
A better approach is to agree specific drafting to provide relief from the effects of coronavirus COVID-19, whether this is disruption to supply chains and labour resources, or the result of the government introducing any emergency powers. The exact requirements may depend on the precise nature and location of the project, and will require careful consideration.
For businesses likely to be affected by coronavirus COVID-19, practical steps include:
- keeping up to date with the latest guidelines issued by the WHO and UK and Scottish governments;
- engaging with your landlord or tenant (as the case may be) to agree concessions acceptable to both parties but ensuring these are documented in very clear terms signed by both parties (and any guarantor) to avoid future disputes;
- reviewing any obligations in leases, construction contracts and other land instruments in light of coronavirus COVID-19;
- inserting epidemic wording into any new contracts of land;
- providing enhanced cleaning measures to frequently touched surfaces;
- where remote or homeworking for employees is possible, arranging for laptops to be taken home; and
- preparing IT systems for additional remote-access usage and capacity enhancement.
Please visit our Coronavirus Resource Center for more guidance across a spectrum of topics.