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Can a tenant refuse to pay commercial rent due to pandemic closures?

Disputes / 05 May 2021

The High Court recently handed down judgments in the separate cases of Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021] EWHC 1013 (QB) and Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863 (Ch). These decisions provide useful insight into how the courts are approaching different defences to debt claim for unpaid rents for commercial premises that had been forced to cease trading under the Covid-19 regulations.

Under the Covid-19 Regulations, many businesses have been forced to cease trading for several months during the pandemic including indoor entertainment, hospitality and retail. Some were able to recently reopen under the Government’s Roadmap whilst many remain forced shut until 17 May 2021 or 21 June 2021.

Many affected businesses have refused to pay rent / defend unpaid rent proceedings for a variety of reasons including being unable to pay and/or refusing to pay on the basis it is unfair whilst they have been prohibited from earning. Landlords have been prevented from taking enforcement action against tenants during the pandemic; the moratorium is currently due to cease at the end of June 2021 but may be extended: Many landlords may have also been forced to agree rent holidays, deferrals and/or rent cuts to help tenants to survive.

 

Background to the cases

The Bank of New York case was brought against four tenants (Cine-UK Ltd, Mecca Bingo Ltd, SportsDirect Ltd and Deltic) who had been unable to trade to various levels, during the lockdown periods imposed by the Government following their refusal to pay rent from the start of the first lockdown in March 2020. Separate proceedings were also brought against TFS for similar reasons albeit they had failed to pay rent since April 2020 and several months’ service charge for 2020 were also still outstanding.

 

In both cases, the claimants applied for summary judgment.

 

The tenants’ legal arguments and courts’ decisions

Here is a summary of the combined arguments raised by the tenants in both cases and the courts’ responses to those arguments:

Tenants’ argument Courts’ decisions
Reliance on the Code of Practice (19 June 2020 and updated on 6 April 2021) with regard to commercial premises and leases encouraging landlords and tenants to communicate and negotiate through a variety of means including rent holidays and deferrals. The Code also emphasised landlords to negotiate rather than issuing proceedings. Whilst noting the rationale for the Code of Practice, the courts also emphasised the code was not a charter for tenants declining to pay rent and refusing to engage.
The rent cesser clause in their lease should be construed to and/or implied to apply on the basis of their inability to occupy and/or to trade and therefore to withhold rent.

 

For the rent cesser clauses to come into play, there must be “damage or destruction” caused to the premises, and there had been no such damage.
The landlords had insured against the loss of rent for the event which precisely occurred, and the tenants paid for that insurance. Whilst the pandemic and lockdown were unprecedented, they could not be described as unforeseeable due to other epidemics like SARS. It was therefore unsurprising the landlords had insured against such matters (referencing the FCA test case on business interruption insurance which our Disputes team wrote about here and the tenants could have taken out similar business interruption insurance themselves.
The lockdown was a frustrating event, and the leases should be treated as suspended or terminated. The court held there was no respectable support for the proposition the lease could be temporarily suspended under the doctrine of frustration.
The claim sought to circumvent the Government’s policies put in place to prevent forfeiture, winding up and recovery.

 

As part of measures to protect the economy, the Government had placed restrictions on some, but not all, remedies that were open to a landlord including their ability to bring a claim for rents and seeking judgment upon that claim.

 

In both cases, the courts were satisfied the claimants had shown the rents were due and that the defendants had no real prospect of defending the claim to recover the outstanding rents. The claimants were therefore entitled to judgment for the rents claimed plus interest.

Comment

 Despite these judgments, many sectors including the hospitality sector continue to call on the Government to consider proposals to tackle pandemic-related unpaid rent bills. UKHospitality recently wrote to the Housing Secretary outlining some recommendations, including:

  • Developing a national-level adjudication process on ‘legacy rent debt’.
  • Sharing the pain of closure between landlords and tenants, with at least 50% of debt written off for the period when operators had to close, and at least 25% written off for the time when firms were allowed to open, but restrictions impacted sales.

On the other hand, LandSec, Landlords British Land and the British Property Federation recently suggested:

  • Normal rents to resume from the next June quarter date.
  • Payments owed from before that date to be ring-fenced and the parties would have until December 2021 to come up with plans, such as full repayments, deferrals or discounts.
  • If the parties could not reach an agreement by this date, they would submit to a binding arbitration.

 

It seems many of the proposals from both a landlord and tenants’ perspectives align with a focus on allowing some additional breathing space, seeking to reach an agreement wherever possible and deferring to an independent body to resolve the dispute if a settlement cannot be reached. There must be a balance between the interests of the parties who have both been affected by the pandemic.

If you are a landlord who needs help recovering unpaid rent and/or service charges or are a tenant seeking to defend a claim and/or to negotiate with your landlord, please get in touch with our highly experienced Property Disputes team.  

 

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This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: mailinglists@greenwoodsgrm.co.uk

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