COVID-19 Real Estate Insights – Property Finance – IFG

Guest Article: Zahir Nayani is a legal director at Foot Anstey LLP and advises on a range of real estate driven transactions for both investors and financial institutions, with a particular focus on Islamic and ethical investment structuring and product development.

COVID-19 has massively disrupted our economy – and the real estate sector is no different.

Of course, the government has announced regular support packages for a whole raft of sectors – including a number that affect the real estate sector. But with all the announcements, its very easy to miss the crucial points.

The aim of this article is to flag 5 real estate related matters that you really need to be aware of.

Before we begin, IFG has a wealth of existing resources on COVID-19 here, so be sure to check that too.

1. Moving House

Perhaps unsurprisingly, social distancing measures have slowed down, but not halted, the housing market.  Fewer physical valuations are being undertaken, mortgage providers are having to reassess applications due to the impact of furlough on applicants’ salaries, and risk appetite has in some cases been tapered down, resulting in mortgage offers being revised.

On 26 March, the government issued guidance encouraging those of us who are moving home to be flexible in light of the pandemic, and specifically set out the following points of note:

• Buyers and renters should, where possible, delay moving to a new house while measures are in place to fight the pandemic.
• For those of us who have already exchanged contracts and the property is currently occupied, all parties should work together to agree a delay or another way to resolve the matter.
• If moving is unavoidable for contractual reasons and you’re unable to reach an agreement to delay, you must follow advice on staying away from others to minimise the spread of the virus.
• Anyone with symptoms, self-isolating or shielding from the virus, should follow medical advice which will mean not moving house for the time being, if at all possible. All parties should prioritise agreeing amicable arrangements to change move dates for individuals in this group, or where someone in a chain is in this group.

In short, brace yourselves for potential delays if you’re currently in the process of moving home and speak with your mortgage provider if that will mean your mortgage offer will likely lapse.

Helpfully, UK Finance have confirmed that that, to support those of us who have already exchanged contracts for house purchases and set dates for completion, all mortgage providers are working to find ways to enable customers who have exchanged contracts to extend their mortgage offer for up to 3 months to enable them to move at a later date.

Remember though, the guidance applies to people buying or selling residential homes which they intend to live in.  The guidance shouldn’t therefore adversely impact property transactions where nobody will be either moving in or out, including:

• buying a vacant property (e.g. a new build property from a developer, or an investment property which isn’t occupied); or
• buying a property which you don’t intend to live in (e.g. an investment property with an existing tenant who is already in occupation).

2. Mortgage Payment Holidays

If you’re experiencing (or reasonably expect to experience) payment difficulties because of circumstances related to the pandemic, you should contact your Islamic or conventional mortgage provider.  This goes for both homeowners and those of us with buy-to-let mortgages (e.g. where the tenant has been unable to pay their rent, and that is impacting your ability to meet your mortgage payments).

The Financial Conduct Authority (FCA) has issued guidance to mortgage providers about treating customers fairly during this pandemic  and that includes offering a ‘payment holiday’ whereby you won’t have to make mortgage payments for a set amount of time (usually between 1 and 6 months from our experience).

The FCA’s guidance to mortgage providers makes it clear that they should ensure that taking a payment holiday won’t have a negative impact on your credit file, nor should you be charged a fee in connection with the grant of a payment holiday (for example, a legal fee for documenting it).

Be mindful however that you’ll still owe the amounts that you don’t pay as a result of the payment holiday, and profit (if your mortgage is Islamic) or interest (if it’s conventional) will continue to be charged on the amount you owe.  Unless your mortgage provider has told you otherwise, you’ll still be charged profit (if your mortgage is Islamic) or interest (if it’s conventional) during the payment holiday.

Your monthly mortgage payments will therefore increase after the payment holiday expires – it really should therefore only be used if you have genuine payment issues as a result of the pandemic and certainly not as a “free for all”.

Currently, you’re able to apply for a payment holiday until 20 June 2020, but the holiday won’t kick in until it has been agreed with your mortgage provider.

If you have a mortgage with Ahli United Bank, Al Rayan Bank or Gatehouse Bank, their online payment holiday request forms can be found by clicking on the relevant hyperlinks.  For those of you with conventional mortgages, similar online forms may be found on the websites for those lenders – which are too numerous to list!

Please remember, it is only a payment holiday if it has been agreed with your mortgage provider – so don’t go cancelling your direct debit!

3. Force Majeure

Those of us renting might well be reviewing our tenancy agreement to see whether the pandemic offers any release from the contractual obligations under it.

Two things to mention at the outset:

• If you’re having payment difficulties, it often makes sense to engage in early and frank discussions with your landlord to prevent the issue snowballing or getting out of hand.
• Landlords should still carry out essential and urgent work to ensure that rented properties are safe and should take a “pragmatic, common sense approach” to resolving issues.

In short however, English law offers a very limited range of remedies for avoiding contractual obligations where a contract becomes difficult or impossible to perform. Only two such remedies are practically available (and, spoiler alert, neither of them are likely to offer much assistance in reality): the first is the presence of a force majeure clause, and the second is the doctrine of frustration.

‘Force majeure’ is an unforeseeable circumstance that prevents someone from fulfilling a contract.  It is extremely rare to find such a clause in English leases, and even more unusual is one that would stipulate a pandemic as a “qualifying event” to trigger its effect.  Force majeure clauses can’t be implied, meaning you can only rely on the concept if it is expressly covered in the lease.

4. Frustration

Perhaps unsurprisingly, there are no reported cases in England where a lease has been held to be frustrated. In the context of the pandemic, it seems highly unlikely that a residential tenant could successfully argue that its lease has been frustrated.

Even most business tenants – such as café or restaurant operators – would have a challenge in successfully claiming under this legal doctrine, despite currently being unable to physically occupy their premises.  The prevailing argument is that their inability to occupy is, at the moment, only temporary.  The matter is somewhat different if there is only a short term of the lease remaining, but I won’t bore you with that right now.

5. The Coronavirus Act 2020

Business landlord and tenants should take particular note of this:

• Landlords can’t evict business tenants on the grounds of non-payment of rent whilst the pandemic continues. This currently applies from 26 March to 30 June 2020 unless subsequently extended.
• Landlords of commercial properties are to be obliged to provide tenants with more breathing space by preventing them from using Commercial Rent Arrears Recovery (CRAR) unless they are owed 90 days of unpaid rent.
• Any winding-up petition that claims that the tenant is unable to pay its debts must first be reviewed by the court to determine why.
• The law won’t permit petitions to be presented, or winding-up orders made, where the company’s inability to pay is the result of COVID-19.

More detail is expected in the legislation, but the government’s press release is here if you’d like the full text.

Concluding thoughts

This whistle-stop tour of the recent real estate focussed changes imposed by the government should hopefully have provided you with some food for thought.  The unique challenges posed by COVID-19 have clearly led to some previously unheard of interventions by the government, and we await news of further developments as they arise.  The information in this article is correct as at 11 May 2020.

Of course, as a lawyer I have to flag that this article is for general information purposes only and not specific legal advice, so please do consult a specialist if you’d like formal advice.  The Law Society’s website is a good place to start.

If you have any questions or comments, please do drop me a line in the comments section below.