COVID-19: Retail Sector Issues in England & Wales

For additional guidance, please refer to Steptoe's COVID-19 Resource Center.

The COVID-19 crisis has imposed difficult global challenges on the retail industry. Mass closures of brick and mortar store fronts and supply chain disruptions have resulted in an unprecedented halt to business activities. Nevertheless, there are some steps retailers can take to better protect their business interests. 

First, retailers should review their insurance policies to identify any coverage that may mitigate the financial impact of COVID-19, such as business interruption coverage. Second, retailers should review their property arrangements to identify options for rent deferrals and/or renegotiation of lease terms. The UK government has confirmed that commercial tenants who cannot pay their rent because of COVID-19 will be protected from eviction. This means no business will automatically forfeit their lease and be forced out of their premises if they miss a payment up until June 30, 2020.

UK Government Support

Retailers should avail themselves of new financial assistance programs. For example, the UK government recently announced a temporary 100% business rates relief for eligible retail, hospitality, and leisure businesses in England for the 2020 to 2021 tax year. Another financial relief program will allow for the deferral of VAT payments, so that payments due between March 20, 2020 and June 30, 2020 will now not need to be made until March 31, 2021.

Other government sponsored programs that can assist retailers include the following:

• The Small Business Grant Fund relates to all eligible businesses in England in receipt of either Small Business Rates Relief or Rural Rates Relief in the business rates system, which will be eligible for a payment of £10,000.
• The Retail, Hospitality and Leisure Grant Fund relates to all eligible businesses in England in receipt of the Expanded Retail Discount with a rateable value of less than £51,000 who will be eligible for a cash grant of £10,000 or £25,000 per property.
• The Coronavirus Business Interruption Loan Scheme provides eligible businesses with access to loans, overdrafts, invoice finance and asset finance of up to £5 million for up to six years.
• The Coronavirus Large Business Interruption Loan Scheme will enable large businesses to access loans. All viable businesses with turnover of more than £45 million per year will be able to apply for up to £25 million of finance. Firms with a turnover of more than £250 million will be able to apply for up to £50 million of finance.
• The COVID-19 Corporate Financing Facility is designed to support liquidity among larger firms, helping them to bridge coronavirus disruption to their cash flows through the purchase of short-term debt in the form of commercial paper. Companies – and their finance subsidiaries – that make a material contribution to the UK economy are able to participate.
• The Coronavirus Job Retention Scheme allows UK employers to furlough employees and apply for a grant that covers 80% of their usual monthly wage costs, up to £2,500 a month, plus the associated Employer National Insurance contributions and pension contributions (up to the level of the minimum automatic enrolment employer pension contribution) on that subsidised furlough pay.
• The Coronavirus Future Fund which is to provide government loans to UK-based companies ranging from £125,000 to £5 million, subject to at least equal match funding from private investors. These convertible loans may be a suitable option for businesses that rely on equity investment and are unable to access the Coronavirus Business Interruption Loan Scheme.
• The Coronavirus Bounce Back Loan is intended to help small and medium-sized businesses to borrow between £2,000 and £50,000. The government will guarantee 100% of the loan and there won't be any fees or interest to pay for the first 12 months. Loan terms will be up to six years. No repayments will be due during the first 12 months. Businesses already claiming under the Coronavirus Business Interruption Loan Scheme cannot apply for this scheme. 

Evaluate Commercial Contracts

Existing contracts between retailers and their suppliers, vendors, and landlords should be evaluated to identify limitations on performance obligations, such as force majeure clauses.

"Force majeure" in the context of commercial contracts is a term used to describe circumstances beyond the reasonable control of a party to the contract that prevent one or all of the parties from fulfilling their contractual obligations. In order to be relied upon, it must be an express clause in the in the contract. The International Better Business Bureau's sample force majeure clause provides significant detail, including covering virus pandemics, which would likely apply to the COVID-19 crisis. What we have seen with retailer contracts in practice, however, is that even when an agreement contains a force majeure clause, they are most likely nowhere near detailed enough to excuse performance of contractual obligations. In the event a force majeure clause is included in an agreement, the following consequences could potentially arise:

• Contractual performance is excused, in whole or in part.
• A delay in performance could be allowed, with an extension of the time for contractual performance.
• A right to terminate might arise.

It is necessary to demonstrate that it is impossible to perform contractual obligations, rather than performance being simply more difficult or more expensive. For example, it is rare to obtain relief from a payment obligation on the basis of force majeure, given that payment can usually be made even in a crisis situation.

Another important consideration is the common law doctrine of frustration whereby parties are no longer bound to perform their contractual obligations and where restitutionary remedies may be available for payments made. The "frustrating event" is one which:

• Occurs after the contract has been formed.
• Goes to the "root" of the contract.
• Neither party is at fault.
• Performance of the contract is rendered impossible, perhaps due to the destruction of the subject matter, where the contract becomes illegal to perform, or it cannot be performed in the specified manner, or it is deprived of its commercial purpose.

However, the contract must be deprived of its whole commercial purpose, if it is to amount to frustration.

A contract will not be frustrated where:

• It is merely more difficult or expensive to perform.
• Impossibility of performance is the fault of one of the parties.
• There is an express provision intended to address the event, such as a force majeure clause.
• Where the frustrating event could have been foreseen.

Retailers need to be aware that the effect of frustration is absolute i.e., frustration quashes the contract altogether.

Some flexibility may have been built into any contract that is currently under review and the contract may include clauses relating to:

• Possible price adjustments.
• Material adverse change.
• Limitations on liability.
• Retention of title.
• Remedies and dispute resolution.

The availability of the above provisions in the contract may provide the retailer with alternative remedies and/or defences with regard to the counterparty.

Insolvency

It is important for retailers to be aware of COVID-19 related insolvency issues.

The directors of retail businesses need to be aware that their duties are owed to creditors, not shareholders, once they know, or should know, that their company is or is likely to become insolvent.  

Retailers must ensure that appropriate corporate governance procedures are followed by the board of directors. All transactions must be carefully reviewed in the context of a company's solvency. The commercial rationale for entering into a transaction should be properly documented.

The UK government has provided for a temporary suspension of wrongful trading, which took effect retrospectively from March 1, 2020. The aim of the temporary suspension is to allow directors to continue trading without the risk of personal liability, even where there is little clarity about the future prospects of the company avoiding insolvency due to the COVID-19 crisis. In addition, a new restructuring regime is being proposed known as "business rescue moratorium." This regime is designed to: (a) prevent creditors from taking action whilst the business seeks a rescue/restructure; and (b) permit the business to continue to access the supply of goods and services if necessary to continue to trade.

Whilst the liability for wrongful trading has been relaxed, the remainder of the director duties as set out in the Companies Act 2006 remain in force, acting as a check and balance and must be complied with. Furthermore other provisions in the Insolvency Act 1986 that include causes of action for claims such as preferences, transactions at under value and transactions defrauding creditors remain in force.  

Directors need to therefore be aware that personal liability still exists, even with the suspension of the wrongful trading rules, and that they may be disqualified from acting as directors in the future, if their behavior is seen as having been unfit in the context of a company insolvency. Directors should consider whether they have the necessary knowledge and skill sets to address solvency related issues. Bringing in a turnaround expert is a route which should be discussed amongst the directors, given the experience of such individuals.

Conclusion

Retailers need to understand the legal remedies that may be available to them as a result of the impact of COVID-19, including the consequences of decisions they take with regard to suppliers, such as cancellation of stock and delaying payment. In addition, exploring alternatives to legal redress such as collaborative efforts with existing suppliers and business partners. There may also be some opportunities for entering into collaboration arrangements with fellow competitors as a means to carry on the business, at least in the grocery sector. The UK competition law rules have been relaxed to a limited degree, in order to permit supermarkets to share data on stock levels and co-operate on some logistics, sharing distribution depots and delivery vans in order to help meet consumer demand.