Year 2000 - the implications for occupiers.

Mark Heighton looks at some of the problems

The retail industry has paid considerable attention to the potential problems for computer software in the Year 2000. This attention has principally focused on retailers' own computer systems, their in-house credit cards and also on products sold by retailers.

There is, however, another aspect to the Year 2000 problem which could have major implications for occupiers of property.

Most will have heard by now that it might be dangerous to fly anywhere on 1st January 2000. It may also be inadvisable to go shopping in any modern shopping centre!

The Year 2000 problem potentially affects the computer software in systems such as escalators, lifts, security systems, air conditioning equipment and fire protection systems.

For retailers who occupy units in shopping centres, most of these facilities are outside of their control and would be the responsibility of the landlord. It will however be the retailers' businesses which are effected in the event of any disruption.
What should be done?

Retailers should begin asking questions of their landlords and their managing agents about these issues now.

On a new letting, retailers should be seeking specific assurances from landlords that the computer software within the shopping centre is Year 2000 compliant and, that where the systems are not compliant, the tenants will not be asked to pay for the costs of upgrading or changing the systems via the service charge or otherwise under the terms of their leases.

On existing buildings, no doubt landlords or their managing agents will already be reviewing the shopping centre computer systems. Again tenants should be seeking assurances, now, as to what action is being undertaken and who is to be responsible for the costs.

Insurance

Insurance also plays a role in this area. Firstly, the retailers on new schemes or existing schemes where new computer software is being installed, should enquire as to what product liability insurance the landlords are obtaining in respect of the new computer systems. Retailers may want to insist that landlords actually ensure that they receive some form of product liability insurance on all new computer software. No doubt if there is a cost implication arising from this type of insurance then retailers will be asked to pay for it via the service charge.

Although this will provide some protection, product liability insurance is not going to be available for all types of computer software and in any event will not, generally, apply to existing software but only to new software supplied.

The second insurance issue is in the context of buildings insurance. Will the landlord be prevented from claiming under its building insurance policy if the damage arises as a result of computer software not being Year 2000 compliant? To take an extreme example, will the insurance claim still be valid if a shopping centre burns down on 1st January 2000 because the sprinkler system fails to put out a fire as a result of a computer software error?

Finally on the insurance issue, retailers should be considering the business disruption elements of their own insurance policies to check what protection (if any) exists if the computer systems to the centre as a whole fail and there is an impact on the retailers' businesses.

Generally landlords are responsible for the maintenance and repair of the computer software used in security systems, escalators, etc. The tenants pay for these costs via the service charge.

Who pays?

When negotiating new leases, retailers may now find landlords trying to specifically exclude liability in respect of any problems which may arise as a result of the Year 2000 problem. Conversely retailers may want to try and ensure that the landlord's covenants relating to maintenance and repair do extend to correcting this type of problem, arguably, at no cost to the tenants.

Retailers should also look closely at the service charge provisions in their existing leases. Many retailers will have attempted to secure in the lease negotiations an exclusion for the cost of repairing or remedying any inherent defects in the shopping centre. Alternatively this service charge may not include the cost of making improvements. Obviously each lease will turn on its own particular wording. It is however arguable that the Year 2000 problem is in many ways an inherent defect. It will be far harder to argue that the system is being "improved".

Other issues

There is one other aspect of the Year 2000 problem which retailers should bear in mind. Those retailers who maintain property databases and rely on the database to notify them of important dates (such as dates on which the tenant can determine the lease), need to be sure that they do not miss an important trigger date because of a potential problem with the computer software.

No doubt other issues will arise over the next year or so, but it is important that retailers, as property occupiers, start considering the property implications now. These are not issues which can be left until December 1999 before they are dealt with.