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Rent arrears claims and Covid-19: High Court judgment

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By Tilly Sharpin

The first reported judgment has been handed down, finding in favour of the landlord in relation to a commercial rent claim defended on COVID-19 grounds.

COVID-19 landlord and tenant measures

In the wake of the COVID-19 pandemic, the government introduced various temporary measures to protect commercial tenants including:

  • Prohibiting enforcement of the right of re-entry or forfeiture of business tenancies 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.

A Code of Practice was also published to assist discussions between business tenants and landlords.

These protections do not affect a landlord’s right to pursue other action for non-payment of rent (for example, claims for debt or damages, drawing down on a rent deposit and claiming against guarantors).

The case

The facts of the case will be all too familiar to many this past year.

In Commerz Real Investmentgesellschaft v TFS Stores Limited [2021] EWHC 863 (Ch) (16 April 2021), the tenant, which operates the retail chain trading as “The Fragrance Shop”, had a ten year lease of a unit in Westfield Shopping Centre, London. As a result of government intervention, it had been required to cease trading for various periods from 26 March 2020. At other times, footfall at the retail centre was significantly reduced such that, while it could trade, the tenant suffered financial hardship which it claimed prevented it from paying the rent and service charge due under the lease.

The landlord filed a claim to recover these arrears in respect of which it applied for summary judgment. In response, the tenant sought to adjourn the landlord’s application relying on three grounds in defence of the claim, each being dismissed in turn:

  • Ground one: the claim was issued prematurely, contrary to the Code of Practice.

There was no evidence that the conduct of the landlord amounted to bypassing the Code of Practice. The correspondence between the parties demonstrated that the landlord had made significant attempts to avoid court proceedings and, in fact, the lack of engagement was on the side of the tenant. The court recognised that the Code of Practice is voluntary, was not intended to alter the underlying contract between landlord and tenant and, in fact, is considered to be outside the litigation process.

  • Ground two: the claim was a means of circumventing the various temporary measures put in place, so exploiting a ‘loophole’ in the legislation.

The court made equally quick work of this argument by stating that the government had simply placed restrictions on some, but not all, remedies available to landlords. There is no legal restriction on a landlord bringing a claim for rent arrears and seeking judgment on that claim.

  • Ground three: the proper construction of the lease was that the rent suspension provisions applied to economic damage, meaning that, because the premises were forced to close due to legal requirement, no rent would be payable (reinforced by the existence of a keep open covenant). Additionally, the landlord was obliged to insure for loss of rent and ought to claim on that insurance before commencing proceedings to recover rent.

While the court recognised that rent was due unless the rent suspension provisions took effect, they detected no ambiguity in the wording of the lease, and it was found that the rent suspension provisions applied only in the limited circumstances that they were expressly contemplated. Here, this was where there was physical damage to the premises and not forced closure by legal requirement.

By contrast, the tenant’s promise to keep open and actively trade expressly considered a scenario where doing so was not possible, because it would be unlawful with the result that the covenant could be suspended by virtue of periods of lockdown.

Further, while the lease did oblige the landlord to insure against listed insured risks, or other such risks as the landlord considered it prudent to insure, the court found that the landlord’s insuring obligation was limited to the named risks only, and the landlord was not obliged to insure against any others (for example, notifiable diseases or government direction) unless it chose to do so.

Regardless, even if there was an obligation to insure in respect of, say, forced closure due to notifiable disease, there was nothing in the lease requiring the landlord to insure the tenant’s business against loss, and the fact that the tenant was obliged to contribute to the cost of insurance did not enable the lease to be construed in that way.

Conclusion

The case paves the way for similar such claims to be found in favour of landlords. Indeed, the court’s treatment of Bank of New York Mellon (International) Ltd & Ors v Cine-UK Ltd & Ors [2021] EWHC 1013 (QB) (22 April 2021) is consistent with the judgment in the Commerz Real case.

The decision usefully confirms that rent claims are available as a landlord’s remedy, irrespective of temporary tenant protections introduced by the government. Despite the fact that retail and other commercial tenants have suffered significantly, as a result of the pandemic, the court can do little to alter the contractual relationship between the parties.

It also serves as a timely reminder that landlords and tenants have separate insurable interests. The prudent tenant may look to arrange their own suitable business interruption insurance in light of recent events.

For further information, please contact tilly.sharpin@twmsolicitors.com

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