What just happened?
A US apparel retailer, ‘Untuckit’ has begun evaluating its stores and leases with landlords as the economy stumbles from the coronavirus pandemic.[1]
What does this mean?
The property market is on the course of decline due to the pandemic crisis. Businesses that lack providing ‘essential services’ to the public are delaying or failing to pay leases for their offices. These include apparel maker, ’Gap,’ office supply chain Staples and fitness operator Equinox who have also not paid rents to their landlords.[2] Furthermore, Corporates and retailers are expected to delay their decision on new leasing of commercial spaces by at least a quarter.[3]
Whilst it is assumed that once the pandemic is over, businesses will resume operations by negotiating with landlords through the course of loans with banks, such a scenario is unlikely to take place. The pandemic crisis mirrors the horror of the 2007-2008 financial crisis where uncertainty ruled in the global economy, leading lenders to pause financial deals.[4] For example, mortgage lenders Nationwide whose ability to carry on producing the price index depended on there being enough transactions, but this index cannot be constructed due to a lag between mortgage application being submitted and approved.[5] This forms another explanation as to why the property market is declining as, without the liquidity, debt, equity and assurance, property transactions cannot be completed.[6] At LawMiracle, we believe that the current climate will create a challenge from a real estate and insolvency perspective in all commercial enterprises that have offices, workshops and factories that came to a halt due to the lockdown.
How does this affect the legal industry?
It was considered that in the short term, since people are going to travel less and staying at home more often will only affect the hospitality and the on-site retailer industry. But during the lockdown, the pandemic worsened, and the failed prospect of flattening the curve may likely cause a prolonged effect on the entire commercial real estate sector. This is because of the weaker global trade caused by reduced travel which has further created uncertainty for consumers and disrupted supply chains from resuming their functions.[7]
It follows that such factors have led investors to become wary of putting their money especially in markets related to hospitality and retailers’ services for acquisitions or construction lending purposes.[8] Consequently, where constructions are halted due to a lack of investments made amid the lockdown, escalating costs of planned office movers have added further pressure on commercial law firms who are struggling to generate healthy revenue.
Firms such as Cooley and Bryan Cave Leighton Paisner who aimed to shift their operations to more modern premises this year are now facing construction delays and ‘onerous new leases.’ In particular, Freshfield Bruckhaus Deringer which was set to move to 100 Bishopsgate until delays due to the lockdown had set aside ‘almost £2million in its most recent UK LLP accounts as capital expenditure related to the move’.[9] The firm will be paying £16.5million a year to work in the office, but such a move in the current climate may be deemed risky due to the high fixed costs. For example, the key factors that collapsed the law firm, ‘Jeffrey Green Russell’ was due to its expensive move to take 105% of the office space.[10] Although the law firms will seek to resolve this problem by utilizing the advantage of ‘rent-free’ periods when taking up a new lease, such fit-out is deemed expensive but as the Financial Times rightly notes, the law firms will remain committed to moving but might seek to renegotiate more extended rent-free periods to reduce the impact of the delayed moves.[11]
In the UK, commercial law firms will need to be wary of how they will respond to cases where the businesses are not able to renegotiate the lease agreements with their landlords. These law firms may look towards applying the Force majeure and the law of frustration in lease disputes. However, it is noted that lease agreements do not contain force majeure clauses that allow parties to end a lease.[12] Tenants may use the doctrine of frustration to exit their lease obligations but due to the high bar of meeting the requirements of frustration, it is likely that the tenant will not succeed.[13] It is noted in this article that the Coronavirus Act 2020 will protect business tenants from forfeiture if they are unable to pay their rent. However, such generosity comes with a price and that is the law only suspends forfeiture for a specific period, it does not prevent rent and other sums under the lease from adding up. This will be a problem for businesses that experienced significant losses from the past few months, as they may struggle to pay the rent accrued during this period once the lockdown is over.
Written by Amarjit Tark
Assessing Firms:
#AddleshawGoddard #Ashurst #BryanCaveLeightonPaisnerLLP #CliffordChanceLLP #Cooley #CMS #Dentons #DLAPiper #ForstersLLP #FreshfieldBruckhausDeringer #GowlingWLG #HerbertSmtihFreehills #HoganLovellsInternationalLLP #JonesDay #LinklatersLLP #MacfarlanesLLP #MayerBrownInternationalLLP # MishcondeReyaLLP #NortonRoseFulbright #OsborneClarkeLLP #PinsentMasonsLLP #SlaughterandMay #TraversSmithLLP #Trowers&HamlinsLLP
References:
[1] Lauren Thomas, ‘Men’s shirt retailer Untuckit taps real estate restructuring firm to renegotiate deals during coronavirus’ (CNBC, 5th May 2020)
[2] Lauren Thomas, ‘Men’s shirt retailer Untuckit taps real estate restructuring firm to renegotiate deals during coronavirus’ (CNBC, 5th May 2020)
[3] PTI, ‘New leasing of office, retail spaces may take hit in short-term due to lockdown’ (The Economic Times Rise, 30th March 2020)
[4] Lidia Dinkova, ‘Coronavirus ‘Brutal’ for Real Estate Transactions as Lenders Hit Brakes on Financing’ (Law.com, 13th March 2020)
[5] James Davey, ‘UK housing market grinding to halt after coronavirus lockdown – Nationwide’ (Reuters, 1st May 2020)
[6] Lidia Dinkova, ‘Coronavirus ‘Brutal’ for Real Estate Transactions as Lenders Hit Brakes on Financing’ (Law.com, 13th March 2020)
[7] Lidia Dinkova, ‘South Florida Hospitality, Retail Sectors Feeling Coronavirus Impacts’ (Law.com, 12th March 2020)
[8] Lidia Dinkova, ‘South Florida Hospitality, Retail Sectors Feeling Coronavirus Impacts’ (Law.com, 12th March 2020)
[9] Kate Beioley and George Hammond, ‘Law firms’ City of London office moves scuppered by coronavirus’ (The Financial Times, 23rd April 2020)
[10] James Booth, ‘Three lessons law firms can learn from rivals’ collapses amid coronavirus’ (City AM, 30th April 2020)
[11] Kate Beioley and George Hammond, ‘Law firms’ City of London office moves scuppered by coronavirus’ (The Financial Times, 23rd April 2020)
[12] William Naunton, Petra Billing, Caroline Yuen, Emma Peveril, Tobias Paul, Ailish Oxenforth, Lorraine Reader, Danielle Pillai and Katie Jacobson, ‘Coronavirus: A UK real estate perspective ‘(DLA Piper, 12th May 2020)
[13] William Naunton, Petra Billing, Caroline Yuen, Emma Peveril, Tobias Paul, Ailish Oxenforth, Lorraine Reader, Danielle Pillai and Katie Jacobson, ‘Coronavirus: A UK real estate perspective ‘(DLA Piper, 12th May 2020)
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.