In depth

Coronavirus: the impact on purpose-built student accommodation

Gateley Legal

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In the immediate, medium, and long term the COVID-19 virus and the various government guidelines and restrictions will inevitably have a dramatic effect on the purpose-built student accommodation (PBSA) sector.

The immediate concerns have tended to be about the health and safety of students and employees living and working in the properties themselves. We have been dealing with various queries on the duties that an operator has with regards to protecting its residents and employees.

The immediate impact

For direct let properties the validity and enforceability of tenancies has become critical from a legal perspective as students have vacated rooms early and are unlikely to return for this academic year. Non-payment of rent and rental arrears are going to be commonplace. It is not just the strict legal position that is relevant though as commercial and reputational issues are also factors being considered. Some operators have already taken the initiative and said that they will not be charging students rent for the remainder of the current academic year. Conversely some operators are finding that they have some international students that, due to travel restrictions and border closures, cannot vacate their rooms and may be looking to stay beyond the expiry of their tenancy. That unexpected occupation during the summer period will need to be managed from both a legal and operational perspective. 

What are the consequences?

The obvious consequence of these immediate issues is a loss of rental income. So, as well as examining the contractual position on their tenancies, operators are also looking at how to mitigate their costs and manage cashflow. Some savings may be achieved by delaying non-essential capital expenditure and also by tapping into the recently announced emergency government initiatives such as the job retention scheme (furloughing employees by agreement). 

Next academic year 

Looking at the medium-term concerns, these tend to relate to the impact on occupancy rates for the next 2020/21 academic year. Most universities have not clarified their position yet, which is understandable in such uncertain times (when things are changing hourly let alone daily), but there are already opinions being expressed that the next academic year may not commence in September and could be delayed as far away as January 2021. The academic year could simply be crammed into a shorter period and/or online teaching could play a part.  

The concerns over occupancy rates for 2020/21 are compounded by the fact that international students, and especially Chinese students, are a vital part of the take up for PBSA schemes. Even if border and travel restrictions are lifted by late summer there are still going to be a significant number of potential students that are reluctant to start their studies in the UK when the circumstances will still be so uncertain. Added to this is the fact that language schools have been closed and many students need to pass language exams in order to obtain study visas. 

The UK final year school students will also be feeling great apprehension when it comes to the 2020/21 academic year with exams being cancelled and grades being assessed on a timetable yet to be clarified. 

The cumulative effect 

The cumulative effect is that it is inevitable that both international and UK students will be looking to defer or withdraw from courses currently due to commence in September 2020.  This again creates rental shortfall issues and therefore potentially breaches of lender covenants for operators and investors. There may also be increased liabilities for any developers/sellers that have already given rental guarantees for academic year 2020/21. For new disposals, where contracts have not already exchanged, it is hard to see how any scheme could be sold in the current market without a rental guarantee covering, at least, 2020/21?

The long-term impact

In the longer term, there may be an impact on the pipeline of new PBSA schemes. Some operators have already indicated that they will delay the opening of new schemes to the start of the 2021/2022 academic year when it is hoped that the operational “normal” will have returned. We have already received numerous requests from clients to review and advise on the potential implications on site acquisition contracts. Developers may need to consider the options available to them (including whether to pull out completely or to renegotiate the terms). For those schemes that are already coming out of the ground it is going to be critical to manage any delays to practical completion. Contractors will be looking to rely on force majeure and extensions of time provisions in building contracts and developers are going to need to consider how any extensions of time or cost overruns flow through into other contracts they have entered into such as the forward sale/funding contracts. 

Issues we are advising upon include:

  • Site acquisition - default provisions and rights of termination;
  • Contractual frustration;
  • Option periods and longstop dates for complying with relevant pre-completion conditions- and possible extensions of those periods;
  • the extent of the parties’ planning obligations (both in respect of the level of endeavours- required and timescales for complying with said obligations);
  • the extent of the parties’ works obligations and procuring of works agreements (again in- respect of both endeavours required and timescales);
  • Deferred payments;
  • Impact of legal charges;
  • Price determination provisions including the implications for any rental guarantees;  
  • Possible impact of force majeure and any good faith provisions.
  • Effects of delay in the completion programme on anticipated completion dates and longstop dates;
  • Possible enforcement action/relief in the event of purchaser default;
  • Possible grounds for arguing contractual frustration; 
  • Nomination agreement or lease obligations; and
  • Tenancy disputes including debt recovery.

More information

If you have any concerns or questions over the progress of your PBSA development or future developments, please get in touch with our expert listed below and we will be happy to talk you through the options available to you. 

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