COVID-19: What are the legal implications for the UK arts market? - Boodle Hatfield

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27 Mar 2020

COVID-19: What are the legal implications for the UK arts market?

As the outbreak of COVID-19 has intensified, the UK art market, an inherently international industry, which thrives on both its domestic and global events, has felt the unprecedented effects. With art fairs cancelled and galleries', museums' and auctioneers' doors forced to close, these are uncertain and exceptional times.

In an industry which encompasses such a wide range of businesses, from the self-employed artist to the international auction house employing hundreds of staff worldwide, the challenges faced by those in the art market will be many and varied. Below we address some key legal implications for the market, and look at the ways Britain is supporting one of its most high profile and lucrative industries.

1. The Arts Council emergency fund

As a result of the crisis, earlier this week (on 24 March), the Arts Council England (ACE) announced a staggering £160 million emergency fund. The response package aims to prevent cultural organisations, freelancers and individual artists from going bust. It includes £20m for individuals (made up of grants of up to £2,500 each), £90m for National Portfolio Organisations (venues and others that get annual funding), and £50m for organisations outside of that scheme.

Since the announcement of the UK-wide lockdown, the ACE also hopes that these funds will encourage creative responses “to buoy the public”.

2. Business leases – temporary protection from eviction

With the UK-lockdown prohibiting galleries, museums, auctioneers and other arts businesses’ ability to operate, many may find themselves struggling to pay the rent due under their business lease. The Government has recognised this, and on 25 March the Coronavirus Act 2020 was enacted, which includes a provision protecting tenants of business tenancies from eviction for non-payment of rent.

The Act provides that a right of entry or forfeiture under a business tenancy for non-payment of rent may not be enforced by action or otherwise by the landlord during the relevant period (being the period from 26 March to 30 June 2020, or such later date as may be specified).

This means that landlords will not be able to re-enter premises or issue proceedings to forfeit a lease (i.e. evict a tenant) for non-payment of rent until at least 30 June. However, businesses must note that it does not prevent the landlord from re-entering the premises for non-payment of the rent falling due in this period after 30 June.

Rather than simply deciding not to pay rent, however, it seems to us that in these difficult circumstances, businesses and their landlords should seek to take a collaborative approach and have open discussions with each other about what the business can afford to pay.

This is not least because the Act only offers a temporary suspension of a landlord’s right to forfeit (rent is, in reality, still payable, and the right to forfeit will come back to life at the end of the relevant period), and interest will typically still accrue under the lease on any late payments. Discussions with the landlord can flush out these points early on, and any agreement should be properly documented, to avoid disputes later down the line. It is therefore recommended that legal advice is sought in respect of such agreements.

3. Additional support for businesses

Businesses in the arts industry will also benefit from the variety of additional measures brought in by the government to support them through this period of disruption. The package of measures include:

  • a Coronavirus Job Retention Scheme (see Employees below)
  • deferring VAT and Income Tax payments
  • a Self-employment Income Support Scheme (see Self Employed below)
  • a Statutory Sick Pay relief package for small and medium sized businesses (SMEs)
  • a 12-month business rates holiday for all retail, hospitality, leisure and nursery businesses in England (which is likely to include a number of businesses in the arts industry)
  • small business grant funding of £10,000 for all business in receipt of small business rate relief or rural rate relief
  • grant funding of £25,000 for retail, hospitality and leisure businesses with property with a rateable value between £15,000 and £51,000
  • the Coronavirus Business Interruption Loan Scheme offering loans of up to £5 million for SMEs through the British Business Bank
  • a new lending facility from the Bank of England to help support liquidity among larger firms, helping them bridge coronavirus disruption to their cash flows through loans
  • the HMRC Time To Pay Scheme

Further details on these measures can be found on the Government website, please click here.

4. Third party contracts

The restrictions imposed due to Coronavirus mean that many are facing disruption, and possibly an inability to perform, their existing contractual obligations. In such circumstances, specific provisions of an existing contract can assist in seeking relief from the potential penalties for failing to perform contractual obligations. This is most commonly attempted by reliance on a “force majeure” clause. This is a standard clause which can be found in many contracts. It is usual for the parties to provide that, should events outside of the control of the parties occur (for example, natural disasters or the outbreak of hostilities), which have the effect that one or both parties cannot perform their contractual obligations, the defaulting party will not be liable for such failures.

Whether you are the one relying on a force majeure clause, or the reliance is being made against you, the specific wording of the contract must be checked. The precise drafting of the clause will determine whether the Coronavirus pandemic is, in fact, covered as a force majeure event under the contract. The burden is on the party seeking to rely on the force majeure clause to prove that the event has prevented, hindered or delayed (depending on the wording of the relevant clause) the performance of the contract.

If there is no force majeure clause, a party may instead look to rely on the doctrine of ‘frustration’. A contract may, in limited circumstances, be discharged on the basis of frustration when something occurs after the formation of the contract, making it physically or commercially impossible to fulfil the contract, or which transforms the obligation to perform the contract into a radically different obligation from that undertaken at the moment of entry into the contract.

Traditionally, the Courts have applied this doctrine as narrowly as possible. However, it seems likely that a party could point to the restrictions imposed which aim to contain the Coronavirus pandemic to meet the requirements of frustration, enabling that party to avoid liability for losses caused by its inability to perform the contract. However, this is a high threshold to meet and the specific circumstances should be looked at on a case-by-case basis. It is inevitable that the application of the doctrine of frustration in respect of the far-reaching consequences of the Coronavirus will be tested in Court in due course. As such, legal advice should be sought when seeking to rely on frustration or when responding to such a claim by the other party to the contract.

5. Employees

The Coronavirus Job Retention Scheme provides support to UK businesses by continuing to pay part of the salary for those employees who would otherwise be “laid off” during the Coronavirus crisis. The scheme will be available to all UK employers “small or large, charitable or non-profit” in any sector. At present, we consider that it will also apply to private/individual employers.

The scheme involves identifying workers as “furlough” (which has the effect of temporarily laying them off). Such furlough workers will remain on the employer’s payroll and HMRC will reimburse an employer 80% of their wage costs, up to a cap of £2,500 per worker per month. The cap is most likely to be gross (as opposed to net) but we await confirmation.

Workers who are furlough cannot do any work for the employer during such period although there have been suggestions that they could work for others.

The employer can, at its discretion, top-up the 80% HMRC payment but it is not compelled to do so.

The scheme will be backdated from 1 March 2020 and it will run until 31 May 2020. It will be extended if necessary.

The system will be managed through an online portal by HMRC. There are aspects of the scheme, however, which need clarification.

6. The Self Employed

The government has now also addressed the issue of the disparity in the financial assistance offered to the self-employed compared with the employed. The Chancellor, Rishi Sunak, announced on 26 March 2020 a package to assist the self-employed, which will be called the Self-employment Income Support Scheme.

The details of the Scheme are still emerging. However, the government have stated that if the self-employed have suffered a loss in income, a taxable grant will be paid to the self-employed or partnerships, worth 80% of their profits up to a cap of £2,500 per month. The scheme is open to those who were trading in the last financial year, still trading now, and planning to continue doing so this year. To qualify for the scheme, the claimant must have a trading profit of less than £50,000 in 2018-19, or an average trading profit of less than £50,000 from 2016-17, 2017-18 and 2018-19. In addition, more than half of a claimant’s income needs to come from self-employment.

The Chancellor stated in his briefing on 26 March 2020 that those who are recently self-employed and do not have a full year of accounts will not receive any help under this scheme.

Initially, the grant will be available for three months in one lump-sum payment, and will start to be paid from the beginning of June.

The Scheme is in addition to government’s confirmation that there will be a six-month delay for tax payments through the self-assessment system.

7. Market innovation

Despite the lockdown, this powerful idea of working together has spread across the country with communities finding new ways to connect with each other virtually.

Online movements are bringing some of the UK’s collections into the living rooms of the nation. Established by Sacha Coward and Dan Vo whilst self-isolating, #MuseumFromHome challenges art lovers to make quick videos about their favourite museum stories. PhD student and former Assistant Curator, Alex Jones, created a video explaining how an electrotype cup from the V&A in London ended up on the set of Game of Thrones.

Museums and galleries are increasing their online presence, providing virtual tours and daily content for us to consume from home. London’s Tate Modern is streaming a series of live performances by Congolese dance artist Faustin Linyekula from 20-29 March. The National Theatre is streaming the best of British theatre live at 7pm on Thursday nights from 2 April 2020.

There are new selling opportunities, too, which those in the arts world may have previously been curious to explore, but were previously lacking the time or impetus to do so. It is no surprise that online platforms offering virtual viewing rooms have reported a spike in demand.

Finally, we have seen the arts industry band together to support the NHS. This week, the Ashmolean Museum in Oxford coordinated a collection of over ten thousand gloves, masks and protective clothing to donate to front-line London ambulance workers. Darren Henley, the chief executive of ACE, has commented that “this is a frightening time for all of us. But, as we distance ourselves from one another in our daily lives, I believe the role of arts and culture in helping to bring us all together will become ever more critical.”

If you have any queries or require any legal advice in relation to the issues raised in this article, please do not hesitate to contact us using the details below:

Arts advice: Simon FitzpatrickRebecca FodenFred Clark and Rosie Adcock

Employment advice: Simon Gorham

Real Estate advice: Simon Williams and Rajeev Joshi

Corporate and Commercial advice: Rahul Thakrar and Charlie Hewlett