As all commercial landlords are aware, there is currently legislation in place which prohibits the usual remedies for landlords when rent hasn’t been paid by the tenant as a result of the pandemic.
Until the end of June this year, landlords are not allowed to forfeit, rely on Commercial Rent Arrears Recovery (CRAR), serve a Statutory Demand and/or wind up a tenant company.
Landlords have always retained the right to issue Court proceedings for a Court Judgment.
Liz Shaw, director and property litigator at Wake Smith Solicitors, looks at how the Courts have favoured towards the landlord in two different cases, and brought more clarity to the issue.
Commerz Real Investmentgesellschaft MBH v TFS Stores Limited - Judgment Date: 16 April 2021
The landlord of a shopping centre was granted summary judgment in respect of its claims against the tenant for unpaid rent. As a result of the Covid-19 Pandemic, the Defendant tenant had been obliged to close its shop in 2020 between 26 March to 15 June; 5 November to 2 December 2020 and from 19 December 2020 until 12 April 2021. The tenant had not paid any rent since April 2020. Monthly service charges were also outstanding.
The Defendant argued the claim was issued prematurely contrary to the Code of Practice for Commercial Property; and the claim was a means of circumventing measures put in place to prevent forfeiture, winding up and recovery and pursuing it was exploiting a loophole in the restrictions placed on the recovery of rent put in place by the Government.
They also claimed the landlord was obliged to maintain insurance for loss of rent resulting from a notifiable disease and/or Government action and had to claim under the loss of rent insurance policy before commencing proceedings to recover rent; and that the rent cesser provisions in the lease, properly construed, applied to the Covid-19 pandemic which amounted to a suspending event for the purposes of the lease.
The Court found for the landlord.
1. Code of Practice - it was clear that the Code did not affect the legal relationship between the landlord and tenant. In fact the Court found that there was significant engagement on the part of the landlord and the lack of engagement, if anything, was on the Defendant’s part.
2. Circumventing other government measures - there was no legal restriction placed upon a landlord bringing a claim for rents and seeking judgment. There was no basis for concluding that there was any restriction on the claimant’s right of access via court proceedings or that any court powers under the Civil Procedure Rules were restricted.
3. Insurance - nothing in the lease that could ground the notion that the landlord was obliged to insure the tenant’s business against loss. 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. The tenant’s obligation to pay for insurance was part of the rent the tenant had to pay for the premises.
4. Rent cesser provisions - the rent cesser provisions were clear. They only applied where there was physical damage to the premises.
The Court held that the landlord was entitled to Judgment and, as the Defendant had no real prospect of defending the claim, and as there were no compelling reasons why the claim should go to a full trial, summary judgment was granted. The Defendant did not rely upon any new principles of law and the tenant could not point to any conduct on the part of the landlord that might be regarded as oppressive, or that the claim had been issued prematurely.
Bank of New York Mellon (International) Ltd and others v Cine-UK Ltd; SportsDirect.com Retail Ltd; Mecca Bingo Ltd - Judgment Date: 22 April 2021
In this case, three commercial tenants argued the terms of their leases had been overtaken by wholly unforeseeable events when they were forced to close during the Covid-19 Pandemic. Each lease contained provisions regarding insurance. Each lease contained a rent cesser clause although worded slightly different in each case. All were to the effect that if access to the property should be destroyed or damaged by specified insured risks, so as to render the property unfit for occupation or use, then the basic rent would be suspended.
The landlords had taken out insurance policies which indemnified them in respect of loss of rent resulting from the interruption of or interference with the business following any human infectious or human contagious disease.
In granting Judgment for the landlords, the Court held:
1. Code of Practice - the Code was clear that tenants who were in a position to pay rent should do so. The Code was expressed to be voluntary and outside the litigation process. The tenants here were not claiming an inability to pay their rents and therefore the Code was not applicable to them.
2. Rent Cesser clauses - the words “damage” or “damaged” was a physical one. The commercial purpose of the rent cesser clauses was directed towards physical damage. It was not clear that the parties would have agreed the rent cesser clauses should operate in the circumstances of the pandemic.
3. Implication of rent cesser provisions - the tenants argued alternatively that rent cesser provisions should be implied into the leases. It was argued that such implied terms would have been fair, reasonable and equitable. However, the obviousness test was not met. The leases were lengthy, standard-form, professionally-drafted documents which appeared to intend to cover the parties entire legal relationship. The implied terms were not necessary to give the leases business efficacy. The Pandemic was unprecedented but was not wholly unforeseeable.
4. Tenants’ rights in relation to insurance taken out by landlords - because the rent cesser clauses had been found not to operate, the insurance policy did not compel the insurer to pay the Landlords sums equivalent to the rent. The tenants argued that as the landlords had chosen to include disease as an insured risk it could not be right for them to have been charged for insurance premiums without obtaining the benefit of rent cover. The Court held that it was logical for the landlord only to have to insure against the consequence of the rent cesser; the tenants were protected by their ability to take out their own business interruption insurance policies. Provisions were primarily for the benefit of the landlord, and limited to cases of physical deterioration.
5. Frustration - the tenants argued that the pandemic had temporarily frustrated the leases so that rent was not payable for periods when their premises were closed. The Court held there was no such thing as a “temporary frustration” which effectively suspended a contract for a period of time. Nor could the tenants argue that the circumstances of the pandemic were supervening events.
As the tenants had not shown any real prospects of success in defending the claims and there was no other compelling reason for the parties to wait for a Trial, summary judgment was granted in favour of the landlords.
What do these cases mean for commercial landlords?
Liz said: “Both these cases bring welcome clarity. That said, it doesn’t mean that all tenants will readily concede in relation to any claims made. Furthermore, each case will turn on the individual wording of the leases. The court did make clear that it had sympathy for the tenant’s position. That said, the court’s approach was motivated by a need to ensure that there was legal certainty.
“Parliament will have to change the court’s approach by passing new legislation, if it so wishes.
“Whilst landlords will be hoping that the pre-pandemic remedies will be available from 1 July, this is a useful tactic in the landlords armoury when faced with unpaid rent.
“It is highly likely that most tenants will find it difficult to sustain a defence and summary judgment should be sought by any landlord in that position. It is also wise to bring this to the tenant’s attention in pre-action correspondence to minimise costs.”
For further advice on landlord issues contact Liz Shaw at Wake Smith Solicitors at [email protected]
