Millions of square feet of new London office space is set to be delivered late, triggering disputes and potential litigation between developers, contractors and corporate tenants.
The coronavirus pandemic has forced contractors to hit the brakes on billions of pounds worth of commercial projects, causing delays which will breach existing contracts with landowners.
“There will undoubtedly be significant litigation coming out of all this,” said Philip Pearce, head of the Central London office agency for Savills.
Most contracts between landlords and contractors included force majeure clauses, which enabled them to extend or alter terms in extraordinary circumstances, said Alison Hardy, head of law firm Ashurst’s global real estate disputes group in London. But with sites permitted to remain open, it was unclear as to whether those clauses would be triggered.
The government advised contractors on Thursday that work should not be carried out if workers were unable to keep a distance of two metres apart, but reversed that decision within hours after pushback from the industry.
Landlords could legally pursue contractors, but it would probably result in a “pyrrhic victory”, said Mr Pearce.
“Some of these contractors could be so out of pocket from collective liability that they go bust. Normally one in every 10 projects might go wrong, this is all of them. No one expects to have a fire in every one of their schemes at once.”
About 11m-12m square feet of new office space is delivered in London each year, according to Knight Frank, the estate agent. More than a tenth of the new space scheduled for 2020 will be in 22 Bishopsgate, a £600m glass monolith, due to complete in the spring.
But the contractor, Multiplex, has stepped away and furloughed staff on the project. About two-thirds of the building has already been leased or is under offer, according to JLL, the property consultancy, with prospective tenants including Nasdaq and Hiscox. Developers include the investment management arm of French insurer Axa.
Toby Courtauld, chief executive of the Great Portland Estates, which owns a swath of London’s West End, suggested other landowners do the same.
“The practical reality is: the contractor will shut the site, because either materials are stuck far away or staff can’t turn up. Pragmatic approaches are the priority — you don’t want to end up in conflict,” he said.
But the late delivery of projects is set to bring uncertainty for companies due to move in, leaving them in some cases reliant on the clemency of existing landlords in negotiating extensions.
“If the current lease has an expiry date looming, that could have some real impacts for the business,” said Patrick Plant, a senior partner in the real estate department at law firm Linklaters.
