19th May 2020

Covid-19, Agreements for Leases and Force Majeure

With building developments largely on hold as a result of Covid-19, specific attention needs to be given to Agreements for Leases (“AFL”) in respect of any pre-lets agreed for the development.

An AFL is entered in to where premises are not yet ready for occupation and governs primarily how the premises are to be built. It will also detail dates by which the premises are to be ready for occupation, typically called the ‘longstop date’, and if the premises are not ready by this longstop date then the AFL will usually provide a mechanism by which it can be terminated.

A classic example of an AFL is where a developer secures planning permission to build a new shopping centre and wishes to pre-let various units prior to the development commencing. This gives the developer security of knowing the shopping centre will be well occupied on the opening date and the tenant the security of knowing what premises they will occupy, what size it will be and the latest date on which the premises will be handed over to them.

For AFL’s with impending longstop dates where completion of the premises will be delayed due to Covid19, the developer will be nervous about the tenant being able to terminate the AFL. Well-drafted AFL’s will typically contain ”Force Majeure” clauses however, which grant the developer an extension to the longstop date equal to the length of the delay giving rise to it.

Generally speaking Force Majeure is an unforeseeable circumstance that prevents the fulfilling of a contract, but as it is not derived from common law the instances in which an event will be deemed to constitute Force Majeure will depend on the exact drafting of the AFL. Typically, the list contains events such as fire, storm, strikes, war, decree of Government (or similar), but on occasion it will expressly include pandemic – in which case Covid19 is clearly caught within Force Majeure.

In instances where pandemic is not included, it falls upon the party seeking to rely on the Force Majeure provisions within the AFL (which more likely than not will be the developer) to prove that the event in question did in fact constitute Force Majeure. With Covid19, whilst it may be possible to rely on ‘decree of Government’ or even other wording within the drafting, this is open to challenge as the Government stopped short of a full lockdown but rather the ‘stay home’ message was only advised / recommended.

In reality, given the unprecedented nature of Covid19 is exactly what a Force Majeure clause is intended to protect against, it may well be that parties mutually accept it as constituting Force Majeure and agree to extend the longstop date within the AFL; however with the downturn in trade resulting from Covid19 it may be that a tenant is looking for a way to wriggle free of the AFL so they are not required to open a new store in these times. In such an instance, as stated above, it would be for the developer to prove that Covid19 constitutes Force Majeure and that they are therefore afforded an extension to the longstop date within the AFL.

For further information on Force Majeure within commercial contracts in general, see our separate blog on the topic here –  In instances where the AFL is silent on Force Majeure, but a party is seeking to withdraw, it may be possible for the common law doctrine of frustration to be relied upon. Our blog on frustration can be found here.

Should you require any further information on the terms of an AFL or have questions about Force Majeure on any property transaction, please do not hesitate to contact a member of our Commercial Property team.

Azeem Arshad
Senior Solicitor

Commercial Property
Blackadders LLP

www.blackadders.co.uk

 

 

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