The impact of COVID will be far-reaching and, in the immediate term, has left many in real estate unsure about how to move forward.
Over the course of the pandemic, lockdown measures have been adopted by the UK and other countries across the globe at varying degrees and often included closing down large swaths of commercial properties.
According to the asset management firm Amundi, retail was one of the segments hit most harshly by the pandemic due to the lockdown measures. Residential real estate on the other hand was also affected by the provisions of the UK Coronavirus Act 2020, which suspended a landlord’s right to take forfeiture action in case of missed payments.
From a contract management perspective this involved the necessity to carefully evaluate the legal status quo:
- Ensuring compliance with current law provisions
- Reviewing and analysing the leasehold agreements clauses and obligations
- Finally, if necessary, renegotiating the leases terms, often under time pressure.
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Contract clauses that UK landlords need to look at typically include:
Rent concessions — According to a report by World Commerce & Contracting Association and iCertis, price was the second most negotiated contract term in 2020. Not dissimilarly, in real estate, the rent value has been on the forefront of renegotiation. Although tenants can request for a rent reduction or a renegotiation of the terms, English and Scots law does not require that landlords must accept the proposal in a commercial lease scenario. However, regarding commercial contracts, this is considered an evolving case law and landlords may experience reputational or commercial pressure to renegotiate lease terms toward a combination of a rent holiday, rent reduction and/or extended time to pay.
Insurance —It’s not uncommon for tenants to pay a premium to landlords that cover insured risks. These insured risks will differ depending on the lease, so it is crucial for the tenant and landlord to review the agreement to verify if the pandemic does fall within the category of insured risks in the lease. In this case, the tenant may qualify for rent suspension by following a strict procedure as outlined by the lease agreement.
Keep open clause —Keep open clauses oblige retail and other tenants to remain open for trading, often for avoiding the impact that closing a shop could have on the centre and surrounding commerce. Due to potential conflicts between the provisions of the lease and the government’s official guidelines and rules, these clauses incite disputes between involved parties and need to be carefully reviewed.
Health and safety — Under Health and safety law, tenants must consider threats to the health and safety of employees, while landlords have responsibilities to the extent they are in control of the premises. Health and safety law mandates that organisations must assess risks to employees, customers, partners, and others affected by their activities; arrange for the effective planning, organisation, control, monitoring, and review of preventive and protective measures; have a written health and safety policy if they employ five or more people; and consult employees about their risks at work and current preventive and protective measures. This would require a reassessment of internal policies and lease agreements to determine who is to bear the cost and the burden of health and safety compliance.
Withholding of rent Under the 2020 Health Protection Regulations, specified leisure and retail premises are required to be closed to members of the public. Landlords can also decide it’s safer and cost effective for the building to be closed, even if there is no legal requirement. It’s debated whether tenants have the right to withhold payment of the rent in these cases, rather than resort to recovering damages for breach of covenant as a separate action. In these cases, the wording of the agreements need to be checked.
The advantages of AI for reviewing contract terms
In all the cases mentioned above, being able to review the lease agreement portfolio at scale proves critical. However, manual review process is tedious, costly and time consuming. A lease agreement can take multiple hours to review and COVID added urgency to the process.
Document review can be tackled using artificial intelligence-powered technology like Cognitiv+. Being able to review a large number of agreements in minutes, quickly identify and extract the relevant terms and feed them into your database management system is critical. Cognitiv+ has been designed to enhance and automate the review of lease agreements at scale.
- Identify and extract key leasehold clauses at scale.
- Automatically identify and extract obligations.
- Extracted information can be integrated into your own system with Cognitiv+ API. You can then use or build your own technology to organize, cluster, and visualize the data.
- Personalise your experience and teach the software what it needs to look for and extract the clauses that matter to you.
- Mitigate the risk in a COVID scenario.
If you would like to know more about our document review technology, we will be happy to provide you with a free demo of our software.