Commercial property contracts – what options are available in light of COVID-19?

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Can the parties terminate the contract?

Commercial contracts, be they relating to land and property or any other type of commercial activity, typically set out the termination rights of each party in some detail.

The right to terminate under a contract does not necessarily exclude the right to terminate under other general legal principles.

In light of the COVID-19 emergency, it’s worth revisiting the clauses in a contract which deal with matters such as:

  • the right to terminate on notice
  • provisions relating to the solvency of the other party
  • provisions relating to forced periods of suspension
  • force majeure
  • government intervention.

However, a party considering giving an notice to terminate would be well advised to carefully consider the potential consequences of doing so, not only because of the possible impact on their business but also because, under English law, wrongful termination of a contract constitutes a repudiatory breach by the terminating party. This may, in itself, have significant financial consequences.

Can the parties vary a contract or renegotiate its terms?

To the extent that the parties can keep their contract on track and avoid bringing claims against each other in respect of the difficult circumstances that the COVID-19 pandemic has created, this may be the optimum solution. However, this may not always be possible.

If parties do agree to vary or renegotiate the terms of their contract, various formalities must be followed to ensure that any variations are legally binding.

In particular, any variation should be recorded in writing and comply with the provisions of the Law of Property (Miscellaneous Provisions) Act 1989.

Variations to a contract cannot be looked at in isolation, as one aspect of a contractual arrangement may have implications for other provisions in the document.

In general, it is always worth checking:

  • insurance requirements.
  • Whether the changes should be (or are) time limited.
  • Whether the variations affect either related transactions or related contracts (for example with subcontractors for site development, or funders etc).
  • Whether any security documents, such as bonds and parent company guarantees, will remain enforceable if the contract is amended, and whether those documents require renegotiation or amendment.

Can the parties just abandon a contract if the coronavirus makes it too hard or expensive to perform?

Unless the contract has been frustrated then, as a general rule, if completing it becomes more difficult or expensive, the party who fails to perform is in breach and must pay damages.

It is of course open to the parties to a contract to bring it to an end by agreeing to abandon it.

Whether this has happened depends on assessing whether one party’s offer to abandon the contract was accepted by the other.  This is unlikely to be established if only one party has acted.

In this respect, contracts dealing with land and property are like any other contract – silence and inactivity are not sufficient to establish abandonment.

Whether you are a commercial landlord or a tenant, our specialist commercial lawyers are on hand to answer your questions, explore your options and advise the best way forward. Please don’t hesitate to contact us.