Legal briefing | Real Estate, Construction & Engineering, Real Estate Development |

The impact of COVID-19 delays on developments

Overview

Developers, pre-let tenants and funders are all looking hard at their development agreements, development funding agreements, agreements for leases and building contracts to assess what impact the COVID-19 pandemic, and the Government's response to it, will have on their current construction works in England. We outline in this note some of the key information and issues for such parties to consider before deciding whether or not to suspend or continue their works.

This is general guidance based on questions we have been asked and which is up to date as at 21 April 2020. Each site and situation is different and advice will differ depending on these. If you would like advice in relation to your particular construction questions, please contact us.

Should the site be closed?

The Government announced on 23 March that everyone in the UK is required to stay at home, except for very limited purposes: food shopping, limited exercise, medical needs and travelling to work for those who cannot work from home. 

On 26 March, The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 came into force with the following regulations relevant to the construction industry:

  • Regulation 6(2)(f) provides an exception to the restrictions on leaving home to travel for the purposes of work where it is not reasonably possible for that person to work, or to provide those services, from the place where they are living; and

  • Regulation 7(b) allows for gatherings of more than two people in a public place where essential for work purposes.

The Secretary of State of Business, Energy and Industrial Affairs followed these up with a letter to the construction sector on 31 March confirming that, whilst the Government has advised that wherever possible people should work at home, for many people working in construction, their job requires them to travel to their place of work and they can continue to do so. 

The Secretary also confirmed that the Construction Leadership Council's Site Operation Procedures published on 23 March ("SOP"), which have been developed to ensure that construction sites are operated safely during this pandemic, align with the latest guidance from Public Health England, including the requirement to maintain a two-metre distance from others. The SOP was updated on 2 April to advise that where social distancing could not be maintained, non-essential work should cease. However, this was withdrawn within a matter of hours following critical industry feedback.

A third version was published on 15 April incorporating updated, and slightly relaxed, guidance from Public Health England on social distancing in the workplace, such as "where it is not possible to follow social distancing guidelines in full in relation to a particular activity, you should consider whether that activity needs to continue for the site to continue to operate, and, if so, take all the mitigating actions possible to reduce the risk of transmission”.

This reflects the Government's desire to keep the construction industry working as far as is safely possible, because of the serious insolvency risks to the industry if it imposes a shutdown of all construction sites across England.

However, the application of these Governmental rules to the construction industry is not clear, and there is much inconsistency in their interpretation. Some developers and contractors are voluntarily closing sites that cannot comply with PHE's guidance, while others are keeping similar sites open where they believe they can.

Whatever decision is made regarding site closures, that decision should be made by the Principal Contractor who is responsible for health and safety at the site under the Construction (Design and Management) Regulations 2015.

How should the site be protected while it is closed?

A development agreement, development funding agreement and agreement for lease may contain provisions as to the way in which a closed site should be kept safe and secure during the lockdown period. This is essential to protect the site and works, and to stop the site being accessed by potential thieves, squatters and fly tippers. However, it also serves to mitigate any liability the landlord and interested parties may have under law to trespassers or other third parties.  Any such obligations for closure and protection of the site would, in practice, likely be passed down to the contractor under the Building Contract. Insurance policies and operational licences (e.g. crane safety licences) will also need to be reviewed to ensure they cover the closed site for the duration.

What happens if there are delays to target and/or longstop completion dates in development agreements, development funding agreements and agreements for lease?

Most development agreements, development funding agreements and agreements for leases that include obligations on a party to carry out works will contain target and longstop completion dates by when the works, or stages of them, should be completed.

Most agreements of this nature will require the developer to keep its funder, tenant or relevant counterparty up to date with material changes to the programme of works. Where possible, we expect funders, tenants and other relevant parties will want to exercise their rights to inspect the progress of works and to receive minutes of any meetings where critical decisions are taken in respect of programme.

There will normally be incentives for the developer party to meet the target dates, coupled with adverse consequences if the target dates are missed, such as liability for liquidated damages or extensions to rent free periods.

It is usual for these agreements to allow the target date to be extended by certain delay events, including force majeure or the granting of an extension of time for some or all "Relevant Events" under the relevant Building Contract. Whether or not the COVID-19 related delay falls within the force majeure provisions of the relevant agreement or entitles a contractor to claim an extension of time under the Building Contract depends on the terms of the documents in question. For instance, force majeure may be expressly defined by a list of events which may or may not include pandemics or be exhaustive.

Developers are also usually under an obligation to mitigate any delays, which might require them to keep sites open where possible, even on a limited staff basis. Developers have tended to bear the risk of delays to the programme for works and might find themselves without protection under agreements with their funder, tenant or other counterparty, and without full recourse to the contractor under the Building Contract for this exposure. 

If the longstop completion dates are missed, then entitlements to terminate agreements could arise. This is particularly the case where developments are time sensitive for delivery, for example, in the case of student housing.

Are extensions of time permitted under the Building Contract?

Whether or not COVID-19 delays entitle the contractor to apply for an extension of time under the relevant Building Contract depends on its drafting. For most commercial developments using a JCT building contract, a contractor may claim an extension of time for "force majeure". However, standard JCT building contracts do not define force majeure, so its meaning will be derived from common law. The COVID-19 pandemic is outside the control of the parties and would lean towards falling within this meaning, but whether or not it actually constitutes force majeure would also depend on the specific circumstances and the parties' knowledge and ability to foresee it.

Other express "Relevant Events" may also entitle a contractor to an extension of time for COVID-19 delays under the Building Contract depending on the actions of the parties and the Government.

In considering any claim from a contractor for an extension of time due to force majeure or any other "Relevant Event", an employer's agent acting on behalf of a developer will consider whether the contractor has:

  1. complied with the notice requirements of the Building Contract;
  2. given sufficient particulars of the expected effects of the COVID-19 delay in support of its claim; and
  3. mitigated the impact of the delay.

A pre-let tenant and funder will want to ensure that this contractual process and determination is strictly followed in accordance with the Building Contract so that any target date under the upstream funding or real estate contract is only adjusted for valid extensions of time awarded under the Building Contract. 

Conclusion

COVID-19 has upended developments across the country and the lack of absolute clarity from the Government to date on which sites should be closed has only added to the general confusion and uncertainty that has become so prevalent. Developers, pre-let tenants and funders need to understand the contractual frameworks governing their developments to ensure that contractual processes are correctly followed in line with the Government's evolving requirements and to minimise the risk of disputes and later court proceedings arising from decisions made during this pandemic.

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