Unpaid Rent and the ‘Covid Defence’.
Two recent cases highlight that Tenants should be wary of relying on a ‘Covid Defence’ when seeking to defend claims for unpaid rent.
Key Contact: Jennifer Butcher
Authors: Hugo Hiley & Katie Lane
Commerz Real Investmentgesellschaft mbh v TFS Stores Ltd [2021] EWHC 863 (Ch) (“Commerz”)
In the above case, the High Court recently held that the tenant, TFS Stores Ltd (“TFS”) in Westfield Shopping Centre in West London was liable for non-payment of rent and service charges incurred since April 2020, despite government measures restricting trading.
Since the outbreak of COVID-19, the government has introduced various temporary measures to protect tenants. These include:
- Prohibiting the enforcement of a right of re-entry or forfeiture of business tenancies in England and Wales on the grounds of non-payment of rent.
- Restricting the use of commercial rent arrears recovery by increasing the minimum net unpaid rent that must be outstanding before it can be used.
- Restricting the circumstances in which winding-up petitions can be presented against companies.
TFS had not paid rent since April 2020 due to closures and a lack of footfall caused by the COVID-19 pandemic and when faced with a debt claim brought by its landlord, sought to rely on the government measures introduced and the following terms of the lease:
- A covenant by TFS to keep open and actively trade, unless prevented from doing so because of damage by an insured risk, or because doing so would be unlawful.
- An obligation on the landlord to insure against the Insured Risks “or such other risks as the Landlord may consider it prudent to insure”.
- Rent cesser provisions, which provided for the rent to be suspended if the shop premises were damaged by an insured risk, or the centre was “so damaged as to materially and adversely affect the Premises”.
The landlord applied for summary judgment against TFS for unpaid rent of £166,884.82 and this was granted by the High Court for the reasons set out below:
The Code of Practice for Commercial Property Relationships During the COVID-19 Pandemic (the “Code”)
One of the arguments by TFS was that the claim had been issued prematurely, contrary to the Code. The High Court rejected this argument on the basis that the Code is mere guidance and not law and therefore does not affect the legal landlord and tenant relationship.
Government’s temporary COVID-19 measures
The High Court noted the temporary measures introduced in respect of COVID-19 but said ‘as part of the measures taken to protect the economy, the government has placed restrictions upon some, but not all, remedies that were available to landlords.’ There are no legal restrictions on landlords bringing a debt claim for unpaid rent and seeking judgment on that claim.
Insured Risks
The occurrence of a notifiable disease was not specifically listed in the lease as an ‘Insured Risk’ and the landlord was under no obligation to insure against any other risks unless it chose to do so.
Rent suspension provisions
The rent suspension provisions only applied where premises were “damaged by an Insured Risk or if the Facility was so damaged as to affect materially and adversely the Premises”, i.e., if there was physical damage to the premises. If there was physical damage to the premises, rent would be suspended until the damage had been fixed. While the obligation in the lease to keep open and to trade was in fact suspended, there was no basis for construing the rent suspension provisions such that they applied beyond instances of physical damage.
Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others
The above case is the second reported judgment on a commercial rent claim involving COVID-19. Unsurprisingly, the facts of this case are not too dissimilar to the facts in Commerz. Similar to the tenant in Commerz, the tenants were unable to trade during the lockdown periods ordered by the Government. Despite this, the court granted in favour of the landlords and the tenants were liable for the rent incurred during these periods. This decision was based on five central issues, each of which was determined in the landlords’ favour:
- Did the Code (as mentioned above) restrict claims by landlords for unpaid rent during the pandemic?
- Were the rent suspension provisions applicable to national lockdowns?
- Should “non-physical” damage or destruction rent provisions be implied into the leases?
- If the landlords had taken out insurance for loss of rent, should the tenants be able to rely on this as a reason to not pay?
- Did the national lockdowns temporarily frustrate the leases?
The answer to each of these questions was no, as concluded by Master Dagnall.
Conclusion
These are the first reported judgments on commercial rent arrears involving COVID-19 and are sure to be welcomed by landlords, many of whom are likely to be keen to recover many months’ worth of arrears as stores are finally opening their doors., On the other hand, the decision is unlikely to be welcomed by tenants who, like landlords, and almost everyone else in the country, have endured a tough year.
There are no doubt more of these cases waiting to be heard by the courts. If we can take away one thing, the judgments in the above cases seem to be explicit of the court’s attitude towards rent arrears, despite COVID-19.
For further information or advice on any of the topics raised in this article please contact our Litigation Team.
