Mar

Will the Coronavirus have a major impact on the commercial property market?

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Commercial Property:

The Coronavirus
contagion technically known as COVID-19 originated in Wuhan, Hubei
province, China but is now spreading at a rapid pace across the
world. It is causing major disruption for businesses, tenants and
landlords. Initially affecting travel companies and hotels, its
effects will be much more far reaching before we’ve done, and as we
are in uncharted territory the end result is as yet unknown.

With stock market
valuations down by an average of thirty per cent currently, and
heading for the 50 per cent drop of a typically serious bear market,
commercial property funds and property values will inevitably be
seriously affected. Depending on how long the crisis lasts, many
businesses will find themselves struggling to pay rent and service
their debts, meaning they could breach the terms of their leases and
face themselves and their landlords with some difficult decisions.

Sales and purchases
are more than likely to be put on hold as vendors and property
purchasers adopt a “wait and see” approach. Most commercial
landlords see their investments as long-term and will generally hold
on and see a crisis through, but the longer the crisis continues,
highly geared commercial landlords will find in more difficult to
service existing debt and raise capital, the giant
shopping centre owner Intu being a case in point.

Many sectors of the
economy are at risk, so landlords need to closely monitor the
financial health of their tenant companies. Retail has been in
decline for some time, so in some cases Covid-19 could be the last
straw. Travel and tourism is badly affected, but now restaurants and
pubs are coming into the firing line, and the construction and
manufacturing sectors may next suffer as materials and component
supplies from our interconnected world dry-up.

In the meantime it
will be important for landlords to monitor the financial health of
existing tenants. Landlords may start to see an increase in rent and
service charge arrears and eventually in voids as tenants default on
leases and put off renewing leases or fail to take-up additional
space.

Conversely, some
sectors like grocery supermarkets and home deliver businesses like
Amazon could be busier than ever, running flat out to keep the
shelves stocked and the deliveries made.

Travel restrictions
and component shortages could lead to labour shortages and delays in
new project starts, leading some tenant companies to rely on force
majeure clauses in their
contracts, to relieve them of their performance obligations.

Most commercial
tenants will be tied-in to long-term leases which, depending where
they are in the lease term, will not allow early termination; their
they lease contracts will rarely have force majeure
concessions.

Landlords will be
reluctant to allow tenants in trouble “off the hook” as they will
then pick up business rates and insuring obligations themselves.
Encouraging tenants to assign their leases or sublet the whole or a
part of their premises may be an optimal solution for some landlords.

In unusual
circumstances it may be possible for a tenant to argue that the
contract is frustrated by operation of the law. The common law
doctrine of frustration means that if a judgement can be
successfully obtained from a court, the contract is deemed nil and
void, and the tenant would be discharged from all its obligations
under the contract (lease agreement). It has to be said that a
frustration judgement would be exceptional in the case of a
commercial lease agreement.

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