Statutory regulations – prohibition and recommendation
The Norwegian Government has adopted a number of temporary resolutions as a result of the Covid-19 situation. Two of the most discussed are the decision to shut down several business sectors, such as preschools, schools, cultural and sporting events, organised sport activities, gyms, hairdressers, physiotherapists, chiropractors, etc. The Government has, (in a press conference on 7 April) stated that they plan to reopen preschools on 20 April, schools (classes 1-4) and a limited part of high school on 27 April, and further with the ambition for all students to, in some way, return to school before the summer. Hairdressers and other businesses that are closed due to infection control can be reopened during April. Further, the imposition of restrictions on overnight stays in second homes outside your own municipality (Norwegian: Hytteforbudet) has been debated. This restriction will be repealed from 20 April, but the Government still advise against unnecessary leisure trips. Furthermore, the Norwegian borders have been closed, and are now in principle only open to Norwegian citizens and to carriers. Citizens are allowed to leave Norway. However they are advised against it, and will be quarantined for 14 days upon return. Furthermore, everyone is advised to practice social distancing. Many businesses have also, on a «voluntary» basis, shut down or have introduced home offices in order to limit the spread of the SARS-CoV-2 virus.
Most contracts governed by Norwegian law either contain express force majeure clauses, or are supplemented by statute law or general principles. Whether the Covid-19 situation is a potential trigger event under a force majeure clause, and what the consequences are, must be assessed specifically in each individual case and depends on the wording of the specific clause, the specific facts as well as the circumstances of the relevant contract.
In short – and subject to the actual contractual provisions, in order to invoke force majeure, a contracting party must in accordance with the general Norwegian principles of law show that:
- The party’s performance has been prevented or hindered by an event,
- The event is beyond the party’s control,
- The event could not have been foreseen at the time the contract was entered into, and
- The party could not have prevented the event or overcome its consequences.
Some force majeure clauses also require that the event in question is of an extraordinary character, and it is not uncommon that examples of such are listed in the clause (i.e. war, natural disasters, strikes, lockouts etc.)
The contractual effects of force majeure may vary. In general, the affected party will not be considered to be in default, and will therefore not be obliged to pay damages for failure to fulfill the agreement. However, if the lack of performance is considered to be a material breach, the counterparty may still be entitled to terminate the agreement.
The Covid-19 situation, which has been declared a pandemic, is without a doubt unforeseeable and beyond the control of businesses generally. However, deciding whether it is an event of force majeure in relation to a specific contractual obligation will also depend on the characteristics of the actual impact.
The decisive factor, however, will be the extent to which this actually prevents contractual fulfillment, for example whether it leads to delays or non-fulfillment of the agreement.
Lease agreements – rent payment
Liquidity problem – general rule
Many businesses are experiencing major reductions in their revenues as a result of the Covid-19 virus. In principle, the lessee’s liquidity problems do not exempt them from the rent payment obligation. The lessee is only exempted from the payment obligation if the fulfilment of the payment is prevented by circumstances beyond the lessee’s control, for example that payment solutions/banks are shut down/not functioning etc.
Standard lease agreement – general rule
Few Norwegian lease agreements regulate force majeure events.
The Norwegian standard lease agreements normally used as a basis for commercial leases stipulate that the lessee is responsible for complying with any public law requirements which affect the lessee’s business. This will in our opinion as a general rule also include any public resolutions that limit the lessee’s business and the intended use of the leased object.
Irrespective of the wording of the lease agreement and based on commercial and other considerations, we see that many lessors and lessees have agreed on alternative and temporary solutions, including delayed payments, rent exemptions, changed payment terms, etc. The majority realises that it is in everyone’s interest to keep the ship afloat.
Support scheme from the authorities
The Government has submitted a proposal for the support scheme for fixed, unavoidable expenses. The Government will cover most of the fixed expenses of companies that are experiencing a substantial revenue loss due to the Covid-19 situation.
The proposal means, among other things, that as of 17 April numerous enterprises will receive monetary assistance with their rental payments and other fixed expenses in the months of March, April and May 2020, (with the possibility of extension). This will obviously have a positive economic effect for lessees and the commercial rental market. A maximum limit of NOK 30 million per entity per month will apply.
The Norwegian Parliament had a first time reading on Tuesday 7 April (a second reading await), where after the support scheme must then be finally approved by ESA. If everything goes according to the Government’s plan, an electronic application portal will be available on 17 April, which will automatically process applications and trigger payments to the relevant enterprises.
What expenses are covered?
The enterprise’s fixed and unavoidable expenses are covered by the support scheme: rent, insurance, electricity and accounting have been listed as examples. For the time being, the fixed expenses incurred in March, April and May 2020 will be compensated, with the possibility of extension if necessary.
Who qualifies for support?
It was previously communicated that viable enterprises with «significant» shortfall in turnover qualify for support. It has been specified that each enterprise must document a monthly shortfall in turnover of at least 30 per cent compared to the same month in 2019. However, for March 2020, a shortfall in turnover of at least 20 per cent compared with March 2019 is required.
Some industries are excluded from the support scheme for now. A few examples are: the finance sector, airlines, enterprises with no activity, enterprises without employees, enterprises undergoing bankruptcy proceedings or that have been declared bankrupts. Revenue or return from capital, real estate or other financial assets is not included as revenue and not comprised by the support scheme. However, real property companies’ lost rental income may be considered revenue and may thus be covered by the support scheme, but a maximum limit will be considered.
Beyond this, all Norwegian registered tax-liable companies are entitled to support (if they meet the set threshold for shortfall in turnover of 30 per cent compared to the 2019 results for the relevant month).
How much support?
The support amount will be calculated according to the following formula: Compensation = shortfall in turnover (pst) * difference between fixed expenses and own risk * adjustment factor.
The support scheme is meant to be two-tiered in that enterprises that have been closed by the Government will have a higher coverage ratio than others. This applies to, among others, physiotherapists, chiropractors and opticians. For such enterprises, the adjustment factor will therefore be 0.9 and the deductible will be NOK 0. For other enterprises that qualify for support, the adjustment factor will be 0.8 and the deductible will be NOK 10,000.
Amounts below NOK 5,000 will not be paid. The Government has also set an upper limit for compensation, which amounts to NOK 30 million per legal entity per month. There will also be a maximum limit for groups.
How will the support scheme work in practice?
The plan is to set up an application portal on 17 April, where the enterprises themselves log in and fill out their application for support (which according to Minister of Finance Jan Tore Sanner will look like a «mini tax return»). The application is then automatically crosschecked against a number of other data registers.
If no major deviations are recorded between the application and the data it is crosschecked against, the application will automatically be approved and money will be paid automatically. If major deviations are registered, the application will have to be processed manually. The proposed application scheme is largely based on trust. However, the applicant must be able to document the figures in retrospect, and the authorities will carry out subsequent controls, imposing fines on anyone who have received payments based on incorrect or insufficient information.
Value Added Tax
Any amendment agreement/supplemental agreement entered into between the lessor and the lessee on rent exemption, rent reduction, changed payment terms etc. may have an impact on the calculation and reporting of value-added tax and the parties’ obligations to the tax authorities. Such an agreement should therefore determine how any possible value-added tax effects should be handled. It should also be stated in the amendment agreement/supplemental agreement that it is a «temporary supplement to the original lease/amendment agreement» or similar. Furthermore, the agreement should state that there is agreement on a temporary change in market rent and/or changed payment terms as a consequence of the Covid-19 situation.
The financing and transaction market
Our understanding is that the market for real property transaction financing is still functioning. However, the banks seem to prioritize existing customers and loans, including discussions on interest-only loans. New projects are more difficult to finance. However, some of the banks seem open to new loans to existing clients, but are particularly willing to complete projects already underway, provided the project is solid. Interest rates are at a record low, following a substantial decrease in the key interest rate of 0.75% in March. However margins are on the rise, and it is yet too early to forecast how the transaction market will come through the Covid-19 situation but for now the attitude seem to be «wait-and-see». The outcome will of course depend on many factors, including how long lasting it will be.
Issues for the board in a world of financial distress
The board of directors has the ultimate responsibility for the management of the company, and is responsible for supervising the executive management and the operations of the company. The extraordinary impact of Covid-19 on the economy will increase the need for boards to exercise these duties in an even more active manner than in ordinary times. It is of critical importance to identify new or increased risks to which the company is exposed as a result of Covid-19 and to consider how the company can best address those risks. For example, issues which the board should consider are: liquidity risk and equity position, assessment of certainty of access to existing liquidity, assessment of risks related to cash flow, operational and contractual risk, employee and management issues.
Wiersholm task force
Wiersholm is currently receiving a number of questions from clients relating to rights and obligations as a result of the SARS-CoV-2 outbreak and the associated Government measures. Wiersholm is on standby 24/7, and have put together a task force of legal experts to provide the best possible assistance to our client’s business. Please do not hesitate to reach out to any member of the task force if you have any queries or comments relating to Covid-19 and its impact on the commercial real estate market or would like to discuss other implications, or you have ideas that may be elaborated on in future newsletters.