Impacts of COVID-19 on purpose built student accommodation projects

6 minute read  27.04.2020 Paul Paxton

The COVID-19 pandemic is taking a significant toll on the short term health of occupancy based concession projects, none more so than purpose built university student accommodation (PBSA). Parties are urgently needing to understand how to respond to the current crises and how projects can remain viable.

MinterEllison has been working closely with our clients to navigate through these complex circumstances and to find a way forward. Here we give a snapshot of the key issues.

Immediate impacts

Universities, investors and their financiers have been focusing on this growing sector of the Australian economy in recent years, with increasing private sector investment in purpose built and university branded student accommodation providing reliable student occupancy levels at reputable universities around the country.

However this investment model has suffered more than other concession based infrastructure projects triggered by the COVID-19 pandemic.

The PBSA sector felt the direct impact of COVID-19 ahead of the rest of the domestic economy. Universities have for many years welcomed a large cohort of Chinese and other foreign students. Given the genesis of the pandemic, one of the first mitigation measures taken by the Australian Government was to prohibit further arrivals of Chinese nationals. This coincided with the time of year when universities typically receive Chinese students settling into their designated student accommodation ahead of the first semester of the 2020 academic year.

At this early stage, universities wanted the ability to show flexibility to their foreign students and allow them time to take up their accommodation or otherwise opt to break their occupancy agreements with no financial penalty given the unforeseen circumstances.

However things evolved rapidly with COVID-19, and far more drastic and restrictive action followed as the pandemic took hold and the Australian economy prepared itself for hibernation.

In tandem with government directions, universities have been at the forefront of taking measures to stop the spread of the virus. This includes closing campuses, mandating online learning and often encouraging student accommodation residents to return their homes, with universities wanting flexibility to temporarily re-purpose student accommodation facilities as required to meet the demands of the current crisis.

Categorising the crisis, contractually

Unlike more traditional social infrastructure (e.g. hospitals and schools), the current PBSA model is based on long-term demand forecasts that require:

  • Student occupancy to remain in line with forecasts in order to meet financial outcomes; and
  • The university taking an active role in managing student bookings of the accommodation and ensuring the rental revenue stream of the project is maintained through its operating activities, including administering receipt of rents from students.

The contracts in place for PBSA projects do not typically give universities flexibility to take the action needed in light of the current crisis without incurring heavy financial penalties. This is because in the usual PBSA investment model, investors have paid an upfront amount to the university for the rental PBSA revenue stream and rely on the university to manage students in their accommodation portfolio to maintain the project's revenue.

Some of the contractual avenues universities have considered include the application of:

These contractual avenues are not straightforward. Taking Force Majeure as an example:

Considering PBSA projects specifically, the declaration of a pandemic is often listed as a 'Force Majeure' event that would provide parties to the contract with relief from having to perform their affected obligations. That is, contractual relief from obligations where those obligations cannot be carried out due to the pandemic.

However the criteria that need to be met for a party to claim relief from their obligations are precise, and it is important not to overlook the detail, including:

  • Is the relief available to both parties to the contract or only to the private sector?
    • Only in more recent PBSA Agreements have universities also been provided with the right to claim Force Majeure relief.
  • Which (if any) obligations of the University are in fact affected by the Force Majeure event?
    • For example, if foreign students are prevented from travelling to Australia to take up their accommodation, does that in fact affect the university's obligations under the PBSA agreement to enforce the corresponding student occupancy agreements?
    • Are these student occupancy agreements in fact legally "frustrated" as a result of circumstances outside of the control of the parties?
    • If the university wishes to release students from their existing student occupancy agreements in the context of closing its campus, how can it give effect to this and maintain flexibility to use the accommodation for other purposes (eg self-isolation, for members of staff etc) in the context of its Force Majeure rights?
  • A further very important consideration is that, once a Force Majeure event is contractually triggered by a party, it starts the clock ticking such that, if it remains on foot for a threshold number of days (typically 180), it may allow the parties to terminate the contract and the university to be required to pay a prescribed amount of compensation on termination. A very real and potentially unintended outcome for the parties, given the uncertain duration of the COVID-19 situation and its primarily financial impacts on PBSA facilities that are otherwise unlikely to be physically affected.

The reality: shared shortfalls / negotiated consents

Ultimately, all the stakeholders in student accommodation projects need to take a pragmatic and long-term approach to resolving how projects can remain on foot during the crisis.

The economic impact of COVID-19 will have created material financial downsides for the parties and a collaborative approach to shared financial adjustments is likely to be required in the context of balancing between the universities' need for flexibility (and greater autonomy over PBSA operations during this unprecedented period), against the revenue required to keep investors solvent and an otherwise healthy project viable into the future.

From the financier's perspective, their flexibility and consent will be required by the borrower/investors, given the 'temporarily' unsustainable financial covenants linked to the loans provided for the project, and the entry into the revised commercial agreements needed with the university.

In many cases this means looking past existing contractual mechanics and creating arrangements that are more tailored to this unprecedented situation - and which accept the reality that collaboration and a mutual sharing of the impacts of this crisis are in the long term interests of all the parties. 

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https://www.minterellison.com/articles/impacts-of-covid-19-on-purpose-built-student-accommodation-projects

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