Ceris Clift of the Property team at law firm Greenaway Scott, looks at the impact of COVID-19 on the UK property market, and reflects on what has already happened, plus what is yet to come.
When the coronavirus (COVID-19) initially broke out in Wuhan China back in December 2019, the majority of people in the UK considered themselves to be a safe distance from the chaos that was unfolding. However, by the end of March we saw the UK, like other countries in Europe such as Italy and France, fall victim to this faceless villain, and on 23rd March the whole of the UK was put on lockdown with no certain end date in site. As well as the considerable health concerns during this pandemic period, there will also be a serious economic impact as a result of the aforementioned safety measures. So how will the pandemic affect property investors, landlords and tenants in the UK?
The impact of COVID-19 has already set the global stock markets on their steepest downward trajectory in decades. On Thursday 19th March 2020, the markets experienced their worst day since 1987. The FTSE 100 index lost 10.87%, while the Dow Jones closed the day 10% down. However, so far reports have shown that coronavirus has had little effect on property market confidence, as a recent survey from RICS welcomed the positive news that house price gains all over the UK had risen at their fastest pace in nearly four years in February and haven't been affected as of yet.
The UK Government have advised that the virus spread will peak in the upcoming weeks, and the expectation is that the markets confidence will only be effected short term, if at all. According to an article by Gary Barker in Forbes whilst the economic impact of the Swine Flu epidemic, which arose in the UK in April 2009, was severe, house prices still rose by 10.1% between March 2009 and March 2010. Barker adds that we should "follow previous economic trends'' as this should support ''stable house prices even if there is a reduced demand''. He also notes that the property investment trend has not been affected by Brexit since January, and therefore to remain investing if financially possible to continue this positive pattern.
The negative impact of COVID-19 on finance
Despite the positive outlook on the property market as a whole, the availability of finance for buyers could suffer as a result of COVID-19 which will lead to a slower pace in individual transactions. Lenders have indicated that some economical changes have already taken place for those looking to invest in the property market since the outbreak. Since the virus hit the UK, bridging lenders (short-term finance) are beginning to put releasing funds on hold, and this is likely to expand across all privately funded firms. Physical surveys of properties are also no longer possible since the UK went into lockdown on 23rd March which will prevent a large number of new cases from progressing.
Furthermore, COVID-19 is having a substantial effect on many individual's financial situation, which could cause hardship for some residential property investors. Tenants will be looking to landlords for rent holidays, which in turn may rely on their landlord obtaining a mortgage holiday. Whilst this may be manageable short-term, some landlords have concerns about how they will recover the back payment of rent after the holiday period, especially if the tenant intends to move out. Furthermore, the landlord may incur additional interest as a result of the mortgage holiday which they will unlikely be able to recover from the tenant.
The positive impact of COVID-19 on finance
Despite the downsides that property investors may be expecting from this pandemic, according to some lenders there are a few aspects to remain positive about. There is currently no restriction on Buy-to-Let mortgage funds being released meaning there are exit options for borrowers on a bridge loan, although this will now be subject to the availability of valuations. The anticipated prolonged effects of COVID-19 has also seen a drop in fixed and variable rates, which is welcomed by all property investors who rely on finance. On the other hand, for those property investors who have cash funds available, this will be a lucrative time to invest while some property values decline.
The impact of COVID-19 on commercial tenancies
The COVID-19 pandemic has also reshaped the relationship between commercial landlords and tenants in England and Wales. A large number of commercial tenants will be unable to continue paying rent under their lease, as their businesses are temporarily closed down or supply chains greatly affected. In order to protect tenants from having their leases forfeited (terminated by the landlord) for failure to pay rent, sections 82 - 83 of the Coronavirus Act 2020 have suspended the landlord's right to forfeiture for failure to pay rent until 30th June 2020. Although this does provide some protection for tenants facing financial difficulties, it is advisable to speak to landlords directly in an attempt to agree a possible rent holiday or a temporary period of reduced rent.
Commercial contracts often contain force majeure clauses which allow either party to legally terminate or suspend the contract if an outside force makes the performance of the contract impossible. Leases do not traditionally contain force majeure clauses, although in the absence of an express force majeure clause, the doctrine of frustration may apply. Frustration also allows a contract to be set aside in the event that it becomes impossible to perform; however it is a remedy granted by the court as opposed to an express clause in the contract. Sadly it is notoriously difficult to prove frustration in a lease contract, as seen in the recent attempt by European Medicines to claim that Brexit had frustrated their lease. In view of this, some tenants are insisting on the inclusion of force majeure clause in leases being negotiated during this period of great uncertainty.
COVID-19 impact on Health & Safety Obligations
Whilst it may prove difficult to guarantee that the COVID-19 virus has not found its way into a commercial premises, certain measures can be put in place to protect the occupiers. There are not yet any specific statutory health & safety duties in relation to COVID-19; however current health and safety law requires employers to do what is 'reasonably practicable' to protect their staff and members of the public. Public Health England have issued guidance on health and safety during the COVID-19 pandemic and these measures have been rolled out in different manners across different commercial premises.
A conclusion of sorts...
There is undeniably a feeling of uncertainty and apprehensiveness that fills the air surrounding the outbreak of COVID-19. This applies across all commercial sectors as well as property investment. It is difficult to deny the fears surrounding the impact of COVID-19 on both national health and the economy. Whilst property transactions may become frustrated during the lockdown period, investors are still keen to progress as soon as possible and there is still movement in the market. There are undeniably difficult times ahead for both landlords and tenants; however there is still a light at the end of the tunnel if both parties can work together for the common good.
Ceris Clift is an Associate Solicitor in the Property team at law firm Greenaway Scott. Greenaway Scott is part of the GS Verde Group, a multi-discipline professional services group, that also includes financial specialists Verde Corporate Finance. For more information, or to contact Greenaway Scott, visit: www.greenawayscott.com or call 029 2009 5500