In this blog, we take a Europe-wide look at how different jurisdictions are dealing with the real estate issues caused by the pandemic.
1. Does each jurisdiction allow tenants to terminate their lease if they are affected by the virus?
'No' in these jurisdictions:
- England and Wales – it is almost impossible for a lease to be frustrated, leases do not typically contain force majeure clauses and a court would be extremely unlikely to imply one.
- Germany – generally the tenant bears operating risk for the premises and a lease can only be terminated if the premises themselves developed a defect that stopped them being used for the purposes that were intended. In Austria, it is also clear that such inability to use be long term in the context of the lease term. Force majeure is not usually seen in leases but is valid if one has been specifically negotiated.
'Yes' in these jurisdictions:
- France, Italy, Austria and Spain and the Netherlands – the law in these countries allows termination of a contract that has become substantially more onerous for one of the parties to perform due to unforeseen circumstances, which could be the tenant becoming unable to pay rent due to the virus. It may be possibly for the other party to avoid termination by agreeing less onerous terms. Force majeure is also a possibility (although it can be specifically excluded in leases). French leases are also capable of frustration. In Austria, generally, short-term impairments would not entitle the tenant to terminate the lease; in the likely event that imposed restrictions of use persist for longer time, tenants may be entitled to extraordinary termination (contractual waivers for force majeure events to be considered).
- Force majeure is implied into Dutch leases unless it is specifically excluded. A tenant can also ask the court to vary the provisions of the lease; rent holidays or partial termination of the lease due to unforeseen circumstances (onvoorziene omstandigheden) which are such that it would be unreasonable and unfair if the unvaried contract were to remain in place. However, the courts are very reluctant to consider situations such as the Covid 19 being sufficient to trigger force majeure clauses, as this is part and parcel of the tenant’s risk.
However, if the tenant is prohibited from using the demised premises by state intervention, the courts will take the view that these are unforeseen circumstances, and may be more willing to grant a rent reductions or a partial termination of the lease.
2. Do leases of certain types of property – hotels, restaurants, retail outlets – typically have keep open clauses? How will COVID-19 affect this?
It is a common feature that leases, where the landlord had economic interests through turnover or variable rents, contain keep-open clauses.
However, in our view, legislation mandating lock-down would trump this obligation.
3. Have the public authorities put any measures in place to help tenants?
'Yes' in these jurisdictions:
Germany – landlords may not terminate leases if the tenant fails to pay rent in the period 1 April to 30 June and can evidence a causal link between the pandemic and their inability to pay.
Italy – since 18 March 2020, there has been a tax credit of 60 per cent of the rent paid in March by shops locked down by Government action, a moratorium until 30 June 2020 on all eviction proceedings, and postponement of fiscal deadlines.
UK – as well as support for businesses to keep workers employed, the Chancellor announced a rates holiday for 2020 for small businesses (those with a rateable value of less than £51,000) in retail, hospitality and other sectors COVID-19 will impact. VAT payments have also been deferred for a quarter. There will be a moratorium on terminating business leases for a period of three months (extendable), but there is no corresponding protection against insolvency measures.
France – suspension of the payment of the rent for small companies directly affected by COVID-19 has been adopted. The relevant rent payment will be deferred, no termination of the lease may be required and no penalties may be applied for a certain period of time.
Austria - An emergency relief fund (totalling to EUR 38 billion) has been established to support those affected by the Covid-19 implications (e.g. by granting liquidity, state guarantees or bridge financing). Furthermore, a reduction (potentially to zero) or non-assessment of advance payments on income tax / corporate tax for 2020, a deferral of tax payments and the option of a payment in instalments have been introduced. Beyond, no dedicated measures aiming at improving the tenant’s legal position have been put in place.
The Netherlands - Tegemoetkoming Ondernemers Getroffen Sectoren COVID-19 (TGOS) were introduced by the Dutch Government on 1 April. This measure provides a one-off allowance of €4,000 for medium-sized businesses – maximum of 250 employees - that are directly affected by the government Covid 19 measures. It is aimed at private retail and leisure businesses who must have a physical presence in the Netherlands, not be subject to insolvency proceedings and have a projected shortfall as set out in the government’s measures.
Agreements have been put in place between retailers outside of the food sector as a result of negotiations between sector organisations and retailers. These too are and subject to certain thresholds. These measures include a switch to monthly rent payments, with a rent holiday for the period 1-20 April with no penalties or interest charged on arrears during this time. There is also a relaxation in complying with operating covenants until the end of April.
'No' in this jurisdictions:
Spain – there have been discussions, but nothing concrete has been announced.
4. Are we seeing conversations between landlords and tenants on rent waivers etc?
Tenants, particularly in the leisure and retail industries, are asking either for rent reductions, or rent suspensions.
Landlords are typically granting interest-free deferrals rather than waivers, either for a defined period or for the duration of the lockdown.
Where state aid is, or becomes, available, we are likely to see landlords putting pressure on tenants to apply for this.
Some landlords have asked for additional 'improvements' to trade for rent concessions, such as introduction of guarantors, extensions of leases, etc.
In jurisdictions that allow the tenant termination rights, we have seen landlords agreeing rent concessions in return for the tenant committing not to terminate the lease.
5. What are the potential implications for landlord debt or bond covenants?
Across all jurisdictions, tenant breaches of rent and keep-open covenants have the effect of putting landlords in breach of their finance documents.
The pandemic will also affect the valuation of, in particular, shops, restaurants and hotels, which may lead to a breach of loan-to-value covenants too.
Landlords should be aware of the risk of waiving breaches or agreeing to variations without lender consent.
A common feature is that there has been no specific legislation aimed at inadvertent breach of loan covenants caused by the knock-on effects of the coronavirus.
6. Is there any evidence of banks restricting drawings on existing facilities and/or failing to offer new facilities where needed?
We are working on a number of live transactions where banks are still negotiating terms. As of now, the market hasn’t shut down for new lending. Asset class and tenant strength/business are clearly important.
We are also seeing drawdowns under existing financing arrangements continue but, to the extent that EoDs are not waived and remain outstanding, these may restrict drawdown requests.
In Germany, we have seen lenders scrutinise drawdowns on account of material adverse change events, negotiate drawdown conditions and even challenge borrowers’ no-default statements.