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Lawbite: Landlords’ success in COVID rent arrears claim

  • United Kingdom
  • Litigation and dispute management
  • Real estate
  • Real estate litigation - LawBite

30-04-2021

Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others [2021] EWHC 1013 (QB)

Commerz Real Investmentgesellschaft mbH v TFS Stores Limited [2021] EWHC 863 (Ch)

Two eagerly awaited High Court decisions demonstrate that commercial tenants are likely to face an uphill battle when defending claims for rent arrears accrued since the start of the pandemic.

In both of these cases the High Court ordered, at summary judgment hearings, that the tenants should pay the arrears. 

  • Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others

The most recent of the two decisions saw three commercial rent arrears cases heard together.  In each of these cases the defendants were commercial tenants who had needed to close their premises and had largely been unable to trade during the periods of national lockdown.  

Of the various grounds of defence raised by the tenants the court in its detailed judgment focused on arguments turning on:

1.   the construction of the rent cesser clauses – whether these provisions had been triggered by the pandemic and resulting periods of lockdown due to express or implied terms in the leases;

2.   Insurance – whether, expressly or impliedly, the fact that the landlords had insured against loss of rent where precisely the event which had occurred took place, and that the tenants paid for that insurance, meant the tenant was entitled not to pay the relevant rent; and

3.   whether the various periods of lockdown were frustrating events such that the leases should be treated as suspended or terminated.

The court was unwilling to find that the rent cesser clause had been triggered.  On their proper interpretation, these clauses were only triggered where the premises were being closed or had access to them restricted by reason of physical damage or destruction.  They did not cover losses incurred due to non-physical effects on the premises. 

Implying into the lease a rent cesser which took effect in cases such as the pandemic would have been fair and reasonable and equitable.  However, doing so was neither so obvious that it went without saying nor necessary to give the contract business efficacy, therefore the test for implying terms was not met. These were professionally drafted leases.  The pandemic, or a pandemic, was not entirely unforeseeable given SARS and consequent fears.  Further, it had been open to the tenants to protect themselves by taking out business interruption insurance, these having been a standard feature of the insurance market for many years. The court rejected the tenants’ arguments as to an implied term.

The tenants’ arguments based on the insurance cover in place also failed.  The court found that the insurance only covered loss of rent so far as such rent was no-longer recoverable from the tenants.  As the rent cesser clause had not been triggered the landlords were still able to recover from the tenants and could not, in the circumstances, compel the insurers to pay those sums.

The court did not agree that a term should be implied into the leases that provided that where landlords insure against losses that arise due to the pandemic (and other diseases) and requires the tenants to pay towards the premiums, they are also obliged to ensure that the insurer could be compelled to pay rent or its equivalent in the event of any resultant closures.

As to frustration, the court was prepared to accept that the pandemic and the lockdown regulations could qualify as a supervening event.  It could not, however, find that these leases had been frustrated.  Key to its decision was that the periods of closure were fairly short relative to the term of each lease (20 years, 15 years and 15 years respectively) and, in particular, unexpired term of each lease (2.5 or 12.5 years (depending on whether a break was exercised), 11 years and 1 year respectively) and that all leases had statutory protection from the Landlord and Tenant Act 1954.

  • Commerz Real Investmentgesellschaft mbH v TFS Stores Limited

The tenant in this matter occupied retail premises in Westfield Shopping Centre, London and had not paid rent/including service charge since April 2020.  The landlord commenced proceedings for the unpaid sums totalling a little over £166,000.   

Of the four grounds of defence raised by the tenant in this matter the court focused on the defendant tenant’s claim that the claimant landlord was in breach of its obligations under the lease to insure.

The tenant’s pleaded case was not put forward at the hearing and in its place it was argued that the landlord was obliged to claim on its insurance for the loss of rent and not proceed against the tenant. Further, it argued that the rent cesser clause had been triggered by the pandemic resulting in a suspension in rent. 

The court found that even if there was an obligation on the landlord’s part to insure against loss of rent and service charges due to notifiable disease or government action, the landlord was not obliged to insure the tenant’s business against such loss. The fact that the defendant was and is obliged to contribute towards the cost of insurance does not enable the lease to be construed in this way. The tenant’s obligation to pay for the landlord’s insurance was part of the rent it pays for the premises.  Further, the rent cesser clause was only triggered where there is physical damage to the Premises, and not where premises were closed due to a legal requirement.

The tenant’s assertion that the landlord’s claim was a means of exploiting a ‘loophole’ in the restrictions upon the recovery of rent put in place by the government (e.g. forfeiture moratorium, enforcement using CRAR scheme) was dismissed.  The court stated that whilst the steps open to a claimant to enforce any judgment flowing from proceedings for arrears may be restricted, seeking the judgment in the first place was not.

Key points

  • over the course of these two cases the court has had an opportunity to consider a number of lines of defences, all of which have been rejected
  • The High Court also rejected defences raised in both cases based on the voluntary Code of Practice for Commercial Property Relationships During the COVID-19 Pandemic (the “Code”).  The Code encourages communication between commercial landlord and tenants in the hope they can reach an arrangement acceptable to both.  As the court stated in the Cine UK case, however, the Code is voluntary and does not change the underlying legal relationship or lease contracts between landlord and tenant and any guarantor
  • the case will have come as welcome relief for commercial landlords who have, since the start of the pandemic, been severely restrained in terms of the options available to them to enforce the terms of their leases. Whether or not the restrictions currently in place, which includes the forfeiture moratorium, restrictions on enforcement using CRAR and limitations on use of statutory demands or winding-up petitions will be extended beyond the current expiry date of 30 June is yet to be seen
  • these cases were decided in the High Court but following an announcement earlier in the year uncontested rent arrears claims commenced in the High Court in London will automatically be transferred to Central London County Court