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Who foots the bill for commercial loss during Covid?

  • Northern Ireland

    19-05-2021

    The COVID-19 pandemic (the “Pandemic”) has had a massive effect on all areas of life, in Northern Ireland and elsewhere in the world. In particular the retail, leisure and hospitality industries have been badly affected. We have seen businesses forced to close their doors to customers in order to comply with government restrictions, with consequential loss of profits.

    In recognition of the difficulties faced by businesses, the government enacted a series of measures, to include the Coronavirus Act 2020 and the Corporate Insolvency and Governance Act 2020. Most will no doubt be familiar with these pieces of legislation, and the restrictions they place on the forfeiture of commercial leases, and presentation of winding up petitions and statutory demands, respectively. At the time of drafting this article, these measures are extended until 30 June 2021.

    Whilst these measures were welcomed by many businesses, where does this leave Landlords of commercial premises? On whom should the financial burden of the pandemic fall? And does there remain an obligation on Tenants to pay rent?

    The recent decisions in England and Wales of Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others [2021] EWHC 1013 (QB) and Commerz Real Investmentgesellschaft mbH v TFS Stores Limited [2021] EWHC 863 (Ch) confirm that businesses remain liable to pay the accumulated rent, despite the myriad of difficulties faced. In this article we will only discuss the former, given the court’s extensive review of the potential arguments a commercial tenant could raise, which encompasses those arguments raised in TFS Stores.

    The facts - what happened in Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others?

    The landlord applied for summary judgement against the tenants (a cinema, bingo hall and retail business) given the accrual of rental arrears. The tenants’ premises had been shut from March 2020 in line with government restrictions, and whilst they may have been able to open for certain periods with restrictions, they had taken the view it was not commercially feasible to do so.

    What did the tenant argue in Court and how were these dealt with?

    1. The Code of Practice for Landlords and Tenants of Commercial Property, June 2020 (the “Code”)

    Whilst this strongly encourages communication and negotiation between landlords and tenants in arrears situations, it does not mandate same. The Code stipulates that tenants in a position to pay rent should and the existence of the Code did not prevent landlords issuing proceedings to recover rent.

    2. Rent cesser/suspension clauses

    Many contracts include a standard clause whereby if access to the premises is destroyed or damaged by an insured risk, the requirement to pay rent is suspended. However closure or inability to trade during the pandemic did not result in physical damage or destruction of the premises, therefore rent remained payable.

    3. Wholly unforeseeable

    It wasn’t appropriate to imply/interpret the rent cesser clause to cover closure or inability to trade, as throughout history there have been such pandemics, including more recently SARS. These were professionally drafted documents, which covered a number of different scenarios and were intended to constitute the whole agreement between the parties.

    Further, the tenants could have purchased business interruption insurance to insure against such a loss.

    4. The landlord’s insurance, which covered interruption/interference with business following human infections/contagious diseases, the costs of which the tenants contributed to, should cover the loss of rent

    The insurance only covered the loss of rent that was no-longer recoverable from the tenants. As the Tenants were withholding the rent, given the cesser clause was not triggered, the landlord could still recover the rent, and the insurer was not compelled to pay.

    5. Temporary Frustration

    The court found there is no such thing as temporary frustration.

    What did the court decide?

    The tenants’ above arguments were dismissed by the court, resulting in summary judgment being granted to the landlord.

    Practical implications

    Whilst this judgement (and the similar finding in the TFS Stores case) were made in England and Wales, and therefore not binding on the courts in Northern Ireland, they are likely to be highly persuasive and indicate how the courts in Northern Ireland will deal with such matters.

    The government (which includes the Stormont Executive) in enacting the above legislation prevented landlords from taking radical steps to remove tenants during the pandemic, but it did not preclude landlords from recovering rent through the court process and these decisions make clear that the obligation to repay the rent accrued during the pandemic remains live, despite the hardships suffered.

    Landlords should however remain cognisant of the commercial considerations in dealing with their tenants, as we hopefully approach an end point to this pandemic. Rental arrears will largely be unrecoverable from an insolvent company.

    For more information, please contact

    Gareth Planck, Partner in Real Estate - GarethPlanck@eversheds-sutherland.ie 

    Emily Paisley, Associate in Dispute Resolution & Litigation - EmilyPaisley@eversheds-sutherland.ie

    This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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