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Leases in shopping centres: A pan-EU and UK view in the wake of COVID-19

03 March 2021
In this article, our EU and UK Retail Sector teams review the resumption of trade in shopping centres, challenges for each market and the key legal issues they expect to face.
Trade resumption does not mean the end of challenges. As regions across the EU and UK move in and out of lockdown retailers and landlords face a number of challenges in dealing with their property portfolio and in particular their lease agreements. Take a look at the current state of play and diverse issues compare across France, Germany, Poland, Spain and the UK below.
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France

 
France

What is the situation and challenges for the market in France?

All shopping centres and retail stores of more than 20,000 sqm have been closed to the public since 30 January 2021, only supermarkets, pharmacies and food retailers (for delivery only and no "click and collect") are allowed to open in these shopping centres. Other shopping centres remain open except restaurants and leisure activities but are subject to governmental restrictions.

Shopping centres and all retail stores which are open must comply with the restrictions limiting trading hours. Since 16 January 2021, a 6pm-6am curfew has been imposed in all territories, meaning people must stay at home (apart from exceptional reasons) and all stores are closed including food retailers, supermarkets, etc. between these hours. Since 27 February 2021, a weekend lockdown is also imposed in certain regions (including several cities such as Nice and Cannes).

In addition, stores including in shopping centres and supermarkets which remain open have to apply the restrictions limiting the number of visitors and oblige to monitoring visitor numbers in real time so as to remain within the applicable limits at all times, 1 customer every 10 sqm for all stores of more than 400 sqm.

A third lockdown is currently under review due to the rebound of the pandemic situation until the end of February 2021 but the French government resists to impose again such strict measures at a national level and has put 20 more regions under monitoring (including Paris region) where a weekend or full lockdown may be imposed in March 2021.


What are the challenges for the market in France?

  • In the near future, the challenge comes mainly from the total uncertainty of the governmental restrictions that are going to be applied or not in March 2021 i.e. lockdown and/or curfew, full week or weekend, national or local lockdown, and, of course for how long shopping centres of more 20,000 sqm are going to be closed to the public. These restrictions have a direct and serious impact on shopping centres, and it is very difficult to predict what will be decided by the authorities as this will depend on a real rebound of the epidemic situation or not. 
  • From now and in the future, 
  • The necessity to re-establish a real business partnering relationship between landlords and tenants, already strained relationships have faced further difficulties due to the strict and conservative approach of some landlords in France during the lockdown periods in 2020.
  • Parties may wish to review the main characteristics of the existing lease arrangements in terms of adaptations or restructuring of the leased premises. They should also consider the level of the rents applicable in shopping centres in 2021/22 and the conditions for the early termination of leases with indemnity or not. The decreasing value of businesses in certain shopping centres and the possible adaptations of lease arrangements in the future may also enable to introduction of more flexibility. Different forms of contractual relationships in shopping centres should be considered, even if flexibility is difficult due to the regulations applicable to commercial leases in France.
  • The possible evolution of consumers' attraction to shopping centres, as the use of e-commerce which was not so developed in France before COVID-19 has increased a lot during the lockdown periods in 2020.
  • The transition to other or new activities (offices & services, retail & leisure, etc.) to attract new visitors and consumers, and the modernisation of shopping centres,
  • New possible restrictions in the new Climate and Resilience Act prohibiting the creation or the extension of new shopping centres in certain areas located in the city outskirts.

What are the key legal issues faced in France?

  • We see an increase in commercial litigation for the cancellation or reduction of the amount of unpaid rent during lockdown periods, as many tenants are seeking such cancellation or reduction - after unsuccessful negotiations on the basis of exceptional circumstances, or "extraordinary change of circumstances", or force majeure. There is no sufficient case law on this to be able to determine what will be the decision taken in case of litigation but it is likely that in most cases at least payment arrangements (such as in 12 or 20 months instalments) should be awarded. 
  • It is unknown what the final position of landlords in shopping centres that have been obliged to close since 30 January 2021 will be and whether such closure allowing tenants to justify the non-payment of rents and on what legal grounds.
  • Discussions and disputes opposing the landlord's and tenant's rights for termination of the lease, termination by the landlord for default of payment and the tenant rights for an eviction indemnity in the event of termination, is the landlord entitled to terminate? Is it possible for the tenant to defend against termination on the basis of exceptional circumstances, force majeure, etc. and therefore to claim the eviction indemnity for termination? From their part, is the tenant entitled to early termination?
  • The possible increase of bankrupt tenants and the resulting legal difficulties for both landlords and tenants, as restructuring or bankruptcy situations often imply complex legal consequences. An increase of bankrupt tenants is expected due to the accumulated debts to be reimbursed (unpaid rents, loans granted under the loan programme launched by the French Government, etc.) and due to the difficulty retail companies face to repair their financial situation at the end of COVID-19 crisis, and once the subventions or partial unemployment subsidies granted by the State cease.
If you have any questions or would like to discuss your COVID-19 response strategy in France please contact Carole Arribes.

The above are only examples of issues that need to be considered and addressed in relation to the legal position of the parties to specific commercial leases affected by the pandemic. The interdisciplinary and multi-jurisdictional retail team at DWF can support you on the full range of issues arising from the COVID-19 pandemic, from protecting your business and your people, to supply chain issues and interacting with your customers. Please get in touch with our country experts today. 

Germany

 
Germany

What is the situation and challenges for the market in Germany?

Germany is currently in its second hard lockdown after the first in spring last year. Restaurants, gyms, cinemas have been closed since November 2020 (takeaway only), followed by retail and personal services such as hairdressers and cosmetics since December 16, 2020. Shopping malls are open, but only for supermarkets, pharmacy, drugstores and stationery stores and respective hygiene regulations apply. "Click and collect" is allowed for all. 

Responsibility for the closure orders lies with the respective federal states, which currently apply the restrictions very uniformly throughout Germany. Most of the measures are extended to 6 March 2021. Initial opening scenarios are under discussion, but manner and timing are currently controversial and it is unclear if the lockdown will – perhaps only partially – be extended again.

What are the challenges for the market in Germany?

The current closures are resulting in significant revenue losses for retailers and service providers, leading to adverse effects for the commercial lease market, such as:

  • Estimates by the German Retail Association predict up to 50,000 stores could be affected by insolvency proceedings. While the state has promised substantial liquidity assistance, it is not flowing as quickly as expected and not all those affected meet the requirements. Insolvency proceedings might lead to high rent losses for commercial lessors if leases are terminated if the business has no future prospects.
  • Online retailers have been able to increase turnover considerably. However, small and medium-sized businesses hardly benefit from e-commerce sales, as they have a lot of catching up to do in terms of digitalisation. Due to the long-lasting closures, a permanent change in consumer behaviour is likely, so shopping centres might be less frequented in the future. This may lead to a drop in rental conditions and therefore figures from rental turnover that are relevant for financing are no longer achieved.
  • Since 1 January 2021 the legislator expressly clarified that COVID-19 related official orders for closures are to be considered as a "cessation of the basis" of a lease. 
  • It is a big problem for retailers that no reliable statements can be made about how long restrictions will apply and whether there will be more closures.

What are the key legal issues faced in Germany?

  • Contractual adjustments of leases

It was highly controversial from a legal point of view that COVID-19 related official orders for closures were considered as a "cessation of the basis" of a lease. Since 1 January 2021 this issue is clarified and forces landlords to negotiate with the tenant about a rent reduction. The new provision does not lead to an automatic rent reduction. A tenant must provide detailed information and figures about the deterioration of their financial situation due to the closure of the rented premises. It is highly controversial which information a tenant has to present and to prove. 

The law does not contain a statement on a central question with regard to lessor's financing. 

  • Restructuring and bankruptcy

The suspension of the obligation to file for insolvency because of illiquidity ended on 30 September 2020 and because of overindebtness on 31 December 2020. The legislator has extended these obligations from 1 January until April 2021. This only applies to businesses that applied by 28 February 2021 for Coronavirus state aid and under the condition that the aid obtained is suitable for eliminating insolvency. In principle, the suspension of the insolvency application obligation can (again) only be considered if the crisis is pandemic related and payment of the aid is to be expected. The regulations are quite complicated and difficult for many directors to examine.

Since 1 January 2021, there has been a new restructuring law in Germany. Germany has thus implemented the EU directive on preventive restructuring faster than planned. There is praise but also some criticism, e.g. that the regulations are not comprehensive enough or that the procedure is not suitable for SMEs because it is too complicated. Irrespective of this, the new restructuring law might help to restructure companies that fulfil the requirements for access, to restructure themselves without insolvency proceedings. The first procedures have started.

If you have any questions or would like to discuss your COVID-19 response strategy in Germany please contact Christiane Huismans.

The above are only examples of issues that need to be considered and addressed in relation to the legal position of the parties to specific commercial leases affected by the pandemic. The interdisciplinary and multi-jurisdictional retail team at DWF can support you on the full range of issues arising from the COVID-19 pandemic, from protecting your business and your people, to supply chain issues and interacting with your customers. Please get in touch with our country experts today. 

Poland

 
Poland

What is the situation and challenges for the market in Poland? 

Trade resumption in shopping centres
Since 1 February 2021, most tenants have been able to resume their activities in shopping malls, following the third lockdown (this time 5 week long) in Poland. As was the case during the previous lockdowns in the spring and autumn, only certain activities were permitted in shopping centres, including the sale of food, cosmetics and cleaning products. These restrictions have been reintroduced in one province (currently the most affected by new infections) since 27 February and will be binding until 14 March (unless extended). 

The easing of restrictions still does not apply to certain businesses, such as restaurants (allowed to operate as takeaways only) or gyms (cinemas have been allowed to open from 12 February, subject to the limit of 50% seats occupation). Shopping centres must operate in compliance with the given sanitary regime. 

What are the challenges for the market in Poland?

Recurring restrictions on retail and service activities are adversely affecting the commercial lease market. The major challenges are: 

  • Dynamic e-commerce growth and changed shopping habits of customers, including reduced frequency of visits to malls and the time spent there; as a result, footfall in shopping centres is not returning to pre-pandemic levels. 
  • Difficulties in reaching a compromise between tenants and landlords regarding revisions of lease terms.
  • An unstable legal environment and the fact that state aid is not available or limited to certain groups of entrepreneurs in the industry.

What are the key legal issues faced in Poland? 

  • Rent abolition in exchange for the lease extension

The "anti-crisis shield" suspended the binding force of lease agreements for the duration of the ban on operating in shopping centres, provided that a tenant who has been subject to the ban submits to the landlord, within 3 months from the lifting the ban, an offer to extend the lease on the hitherto existing terms, for a period equal to the duration of the ban plus 6 months. The regulation is being criticized by both tenants and landlords as unsuitable to a situation in which the bans are reintroduced periodically. 

  • Judicial modification or termination of a contract 

Many tenants are seeking further remedies through judicial modification or termination of their lease on the grounds of an "extraordinary change of circumstances" (rebus sic stantibus). In many cases, the courts have already issued injunctive relief in favour of tenants, e.g. by setting reduced rent for the duration of the dispute, or have dismissed such applications. Does this remedy apply in every situation? What is the likelihood of a lease being terminated under this procedure? In what circumstances may a motion for injunctive relief be justified?

  • Restructuring and bankruptcy

Faced with months of struggling with the economic effects of the pandemic, many entities are choosing to initiate restructuring proceedings, especially under the simplified procedure introduced within the "anti-crisis shields". Experts also predict more bankruptcy petitions than before. Parties to lease agreements should be aware of how their legal situation changes may change under such proceedings. 

If you have any questions or would like to discuss your COVID-19 response strategy in Poland please contact Małgorzata Lesiak-Ćwikowska.

The above are only examples of issues that need to be considered and addressed in relation to the legal position of the parties to specific commercial leases affected by the pandemic. The interdisciplinary and multi-jurisdictional retail team at DWF can support you on the full range of issues arising from the COVID-19 pandemic, from protecting your business and your people, to supply chain issues and interacting with your customers. Please get in touch with our country experts today. 

Spain

 
Spain

What is the situation and challenges for the market in Spain?

The Spanish Government declared a second state of alarm on the 25th October 2020 which is currently in force. Compared with the previous declaration (which lasted from the 14th of March to the 21st June 2020 and implied very strict measures for the population and businesses), the current state of alarm is more decentralized and gives the Governments of the 17 autonomous regions (plus the two autonomous cities of Ceuta and Melilla) of Spain the competencies to apply, supervise and adapt the measures in their respective regions and accordingly to the evolution of the pandemic in their territories. In practice, this has resulted in different degrees of restrictions depending on the territory with regards to the activity in shopping centers. As an example, some regions have seen their shopping malls closed (only retail stores allowed to open from Monday to Friday) while in other regions there were no restrictions at all. These measures change regionally and are adapted to the particular situation of each territory.

What are the challenges for the market in Spain?

The diversity of the measures applied is implying that businesses are unable to perform equally across the Spanish territory. Furthermore, e-commerce has increased significantly in Spain during lockdown (which has led to an increase in investment of logistics assets). This has changed the shopping habits of the costumer, especially from the perspective of shopping centres which have experienced a loss of visitors even after the restrictions were eased.

Despite the possibility for some lessees to request a reduction or a moratorium in the payment of the rent of the leased businesses under certain circumstances (a measure approved by the Spanish Government in the first stages of the pandemic), a number of business are facing serious risk of imminent bankruptcy as a result of the economic context and the continuous disruptions in their activity. This is in spite of the extension of the deadline to enter into a voluntary arrangement with creditors (14 March 2021). 

What are the key legal issues faced in Spain?

The main issue in Spain right now are the huge problems between big malls and the lease agreements. Leasers are not allowed to open due to the pandemic and the lease agreements are still in force. Thus, big efforts are needed to renegotiate the lease agreements or to defend the owner or the leaser with regard to the termination of the agreements or the reduction on the price to be paid each month.

If you have any questions or would like to discuss your COVID-19 response strategy in Spain please contact Iñaki Frías or Jordi Sánchez.

The above are only examples of issues that need to be considered and addressed in relation to the legal position of the parties to specific commercial leases affected by the pandemic. The interdisciplinary and multi-jurisdictional retail team at DWF can support you on the full range of issues arising from the COVID-19 pandemic, from protecting your business and your people, to supply chain issues and interacting with your customers. Please get in touch with our country experts today. 

UK

 
UK

What is the situation and challenges for the market in the UK?

The UK is currently in its third lockdown although the governments of England, Wales, Scotland and Northern Ireland are each setting out their plans for easing restrictions over the coming weeks and months, the plan is that: 

  • In England non-essential retail stores will be allowed to re-open no earlier than 12 April; 
  • In Scotland 26 April has been indicated as a possible date for non-essential retail to re-open; and
  • In Northern Ireland baby equipment shops, clothing shops, footwear shops, and electrical goods shops can provide contactless click-and-collect services from 8 March 2021 with the remaining restrictions on the opening of non-essential retail unlikely until at least 1 April 2021.  

Given the lockdown was imposed at the end of December, the loss of Christmas and January sales trading has affected bricks and mortar non-essential retailers significantly despite the fact that many have accelerated or improved their online offering.

What are the challenges for the market in the UK?

COVID-19 has accelerated changes that were already happening in the UK retail market. The key challenges are:

  • The exponential growth of online retailing will lead to a reduction in footfall to the UK high street and shopping centres in particular. This will be compounded by the fact that a number of longstanding retailers have entered into insolvency, including a number of department stores who would have been anchor tenants in shopping centres. Shopping centres owners will have to be innovative in dealing with such vacant space to minimise further impact on footfall but attracting new investment will be challenging. 
  • Business rates can be prohibitively expensive. The current business rates holiday for retailers in England, Wales and Northern Ireland is due to end on 31 March 2021 but is likely to be extended in England and Wales (with further targeted relief likely in Northern Ireland); in Scotland, it has already been extended until 31 March 2022. Many believe that despite the current reliefs; reform is desperately needed of this tax regime to level the playing field between online retailers and retailers who predominantly trade from physical stores. 
  • Inflexible leasing arrangements which are mostly not linked to turnover contain upward only market rent reviews and few opportunities for tenants to end the lease should market conditions make a particular store no longer viable. 

What are the key legal issues faced in the UK?

Currently commercial landlords cannot bring leases in England, Wales or Northern Ireland to an end by way of forfeiture for non-payment of rent. This measure was put in place last year and is due to end on 31 March 2021 although it may be extended. Additionally, landlords in England and Wales cannot rely on the use of the Commercial Rent Arrears Recovery provisions which would normally permit landlords to recover unpaid rents by seizing goods. 

In Scotland, the position is different. Forfeiture for non-payment of rent was not excluded, but made subject to an extended 14-week notice period for tenants to settle arrears before forfeiture could occur. News is currently awaited on whether the Scottish government will exercise its powers to extend this measure otherwise due to end on 31 March 2021 to 30 September 2021. There are not the same restrictions on other landlord remedies for non-payment as exist in England. 

Although these measures have provided some additional protection for retailers, no legislation has been introduced to relieve non-essential retailers from paying rents during periods of national lockdown; the national governments have left it to landlords and tenants to work out a compromise between themselves and many landlords and tenants have agreed a series of rent concessions (for example rent free periods or rent deferments) since March 2020. 

In light of this, many retailers are seeking to future-proof their leases by either adopting a turnover-based model for rent calculation, incorporating a form of rent suspension in the event of future pandemic-related closures or building in more flexible break options.

If you have any questions or would like to discuss your COVID-19 response strategy in the UK please contact Rachel Lawler.

The above are only examples of issues that need to be considered and addressed in relation to the legal position of the parties to specific commercial leases affected by the pandemic. The interdisciplinary and multi-jurisdictional retail team at DWF can support you on the full range of issues arising from the COVID-19 pandemic, from protecting your business and your people, to supply chain issues and interacting with your customers. Please get in touch with our country experts today. 

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