Out on their arrears: tenant arguments dismissed in pandemic rent arrears cases

The COVID-19 pandemic lockdowns prompted some commercial tenants to stop paying rent and service charges due to landlords under existing leases. For many tenants this was a necessity because of sudden financial hardship. But others felt they shouldn't have to pay for closed premises.

Claims brought by landlords for unpaid rent are now reaching the courts. Will judges break new legal ground and help tenants mitigate lockdown-imposed financial losses?

So far, the answer has been no. The courts have been clear that tenants should meet their obligations to landlords unless lease terms expressly allow them to do otherwise. The courts have been unwilling to bend and stretch standard clauses in commercial leases or imply new terms into existing leases in response to the circumstances of the pandemic.

This article covers key takeaways from two recent cases:

• Commerz Real Investmentgesellschaft mbH v TFS Stores Limited [2021] (Commerz) in the High Court which concerned a retail premises at Westfield Shopping Centre at Shepherd's Bush, the tenant trading as ‘The Fragrance Shop’ under a five-year lease agreed in 2019. The landlord was successful in their application for summary judgment for unpaid rent of £166,884.82 (inclusive of VAT) and interest at the rate specified in the lease.

• Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others [2021] (BNY Mellon) a further successful High Court application for summary judgment in relation to unpaid rents in a number of related cases. The landlords were Bank of New York Mellon (International) Limited and AEW UK REIT Plc claiming against tenants Cine-UK Ltd, Mecca Bingo Ltd and SportsDirect Ltd. Tenants were occupiers of various retail and leisure premises under leases agreed between 2002 and 2017 with terms between 15 and 35 years.

Key case takeaways

All tenant arguments failed in both cases. In particular we learned:

Neither the Government's COVID-19 legislation nor voluntary commercial property code are barriers to landlord claims for rent arrears

• The Government introduced a voluntary Code of Practice for commercial property relationships during the COVID-19 pandemic in June 2020. The Masters in both cases stressed that adherence to the code is voluntary and encouraged but it is neither mandatory nor does it affect or take precedence over any lease or other legal contract.
• Similarly, both cases show that landlords remain entitled to bring claims for unpaid rents in spite of the Government's temporary legislative measures to protect commercial tenants and prevent forfeiture, winding up and recovery using CRAR during the COVID-19 pandemic (section 82, Coronavirus Act 2020).

Rent cessers should be strictly interpreted

• The leases in both Commerz and BNY Mellon contained rent cesser clauses (a provision that suspends a tenant's obligation to pay rent for a temporary period following damage to the premises until reinstatement). The tenants argued that these rent cesser provisions were effective during pandemic closure periods.
• In Commerz the rent cesser was drafted to apply following "damage" to the property by an insured risk or if the landlord's shopping centre was "so damaged as to affect materially and adversely the [tenant's] Premises…". Chief Master Marsh decided 'damage' should be interpreted as covering physical damage only. A legal requirement to close premises was not physical damage. Rent cesser provisions must expressly provide for the circumstances where they are intended to apply.
• In BNY Mellon the operative words were "damage or destruction” and Master Dagnall reached a similar conclusion.
• BNY Mellon also clarified in what circumstances a court can imply terms into rent cesser provisions. The tenants argued that, in the absence of an express term, the court should imply a term into the lease giving effect to the rent cesser during the pandemic period. Master Dagnall concluded that to imply a term into a lease it must be so obvious that it "goes without saying" that it should be included or required to give a lease business efficacy.  Neither of which applied in these circumstances. His view was that business leases are carefully drafted and intended to set out all the circumstances in which a rent cesser would apply.

The same applies to insurance provisions

• Insurance and allocation of risk between landlord and tenant was a major point of discussion in both cases. The tenants' basic premise was that landlords should first look to their insurance where rent remained unpaid due to the pandemic.  
• Commerz clarified that a landlord does not have to make an insurance claim unless the lease expressly compels them to. In the case in question there was nothing in the lease to oblige the landlord to insure against notifiable diseases or government direction. Chief Master Marsh concluded that the loss suffered by the tenant during the pandemic properly falls within the scope of business interruption insurance, which a tenant may choose to take out to protect their business, not the landlord's insurance which was concerned with damage to the landlord's property, not the tenant's business.
• Dagnall in BNY Mellon adopted similar conclusions. In this case the landlord's insurance covered loss to the landlord arising from activation of the rent cesser provisions in the lease. As the rent cesser had not been triggered by the pandemic, there was no loss to the landlord recoverable under its insurance and no obligation on the landlord to make an insurance claim.

The pandemic is not a legally frustrating event

• In BNY Mellon the tenants attempted to apply the legal doctrine of frustration to claim the lease, and so their obligation to pay rent, had been brought to an end temporarily during the pandemic lockdowns. Master Dagnall's view was that a tenant incurring an 18-month interruption to their use of a property held under a 15 to 20 year lease term protected by the 1954 Act was not sufficient to be so unjust for a lease to be brought to an end under the doctrine.
• Furthermore, there was no such thing in law as a 'temporary frustration' which suspends a contract for a short period.

Practical steps for landlords and tenants

We will likely see similar cases over coming months. There are themes emerging for landlords and tenants revisiting property strategy and approaches to lease negotiation in light of the pandemic:

• Take a realistic and pragmatic approach to sharing risk at the time of lease negotiation. Given the strict approach by the courts and their unwillingness to imply new terms into leases, landlords and tenants should negotiate careful and comprehensive rent cesser clauses (and corresponding insurance) at the time of lease agreement taking account of current and anticipated business risks. Monthly rather than quarterly rents may help manage cash flow in choppy economic waters.
• Prevention is easier than cure for both landlords and tenants. To avoid expensive litigation, take a conciliatory and pragmatic approach to disputes. Both landlords and tenants should focus on collecting and maintaining property data so they can assess impact and respond quickly in the event of disputes or economic shocks. They should collaborate internally across risk and estates functions to understand red lines and business critical issues.
• Review insurance cover. Both of the cases in question considered the role of insurance, who should insure, and what is commercially acceptable. Both landlords and tenants should revisit insurance policies to check their coverage is sufficient.  

See also: 'Commercial lease terms following COVID-19: WH Smith Retail Holdings Limited v Commerz Real Investmentgesellshaft MBH'

If you've got questions about anything raised in this article, please contact us, or find out more about our Property Litigation and Real Estate services.