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21 April 2021

Lockdown arrears: the High Court gives its view

In Commerz Realinvestmentgesellschaft mbh v TFS Stores Limited [2021] EWHC 863 (Ch), the High Court has given judgment on a landlord's summary judgment application relating to rent arrears which had become owed by the tenant since the COVID-19 pandemic hit.  A number of interesting issues were dealt with by the Court, including the landlord's obligation to insure and the rent cesser provisions within the lease.

Facts

The tenant had a five-year lease of a unit within Westfield's shopping centre at Shepherd's Bush, which it operated as The Fragrance Shop.  The tenant had been obliged to cease trading at the premises on 26 March 2020 due to the COVID-19 pandemic.  It remained closed to the public until 15 June 2020.  It was then closed again between 5 November - 2 December 2020 and between 19 December 2020 - 12 April 2021.

The tenant had failed to pay rent since April 2020 and also owed certain service charges.  The landlord issued a claim for rent amounting to £166,884.82 (inclusive of VAT) and interest at the contractual rate. 

Court's views of the tenant's Defences

Defence 1 - premature issue of the claim/implications of the Code of Practice?

The tenant's defence argued that the arrears claim had been issued prematurely, contrary to the Code of Practice for Commercial Property Relationships during the COVID-19 Pandemic.  By the time of the hearing, the tenant suggested that this argument supported submitting the claim to trial rather than dealing with it via summary judgment - on the basis of the landlord's conduct in failing to engage with the tenant before issuing the claim.

Master Marsh noted that the Code does not affect the legal relationship between landlords and tenants and stated that it "is not a charter for tenants declining to pay any rent".   Moreover, there appeared to be no factual basis for the tenant's submission; the witness evidence showed there had been significant engagement by the landlord and that, if anything, the lack of engagement was on the tenant's side.

Defence 2 - was the claim exploiting a loophole in the government's restrictions?

The tenant submitted that the claim was designed to circumvent measures put in place by the government to restrict the remedies normally available to landlords for recovering rent arrears, namely forfeiture, winding up and CRAR. 

The Master noted that the option for the court to determine a tenant's liability to pay rent was unaffected by these measures and he found no basis to support the view that landlords’ right of access to the court, or the courts' powers under the CPR, should be restricted.

Defence 3 - landlord's failure to insure against loss of rent due to forced closures and/or denial of access due to notifiable disease and/or government action

This element of the tenant's defence was initially based on the allegation that the landlord was in breach of its obligation to insure under the lease.  The tenant argued that it was reasonable to expect the landlord to insure against loss of rent due to forced closures and/or denial of access due to notifiable disease (accepted by both parties to include COVID-19) and/or government action ("the Extra Risks").  The landlord argued that it was not required by the terms of the lease to insure against the Extra Risks, nor loss of rental income attributable to such events. 

The tenant had only sought and obtained disclosure of the landlord's insurance policy shortly before the hearing. This led to the tenant slightly changing its case on this point at the hearing, including to argue that the rent cesser provisions in the lease should apply in the event of a pandemic.  It also submitted that any dispute about an abatement of rent should be referred to an independent expert.

Insured Risks

The "keep open" provisions in the lease contained an exclusion where the tenant was prevented from trading from the unit because of damage by an "Insured Risk" or where it was unlawful to do so.  There was a lengthy list of risks within the definition of "Insured Risk", but the Master observed that it did not refer to notifiable diseases or closure as a consequence of legal obligation. 

The definition of “Insured Risk” concluded with a "catch-all" referring to "such other risks as the landlord may consider it prudent to insure".  Despite the requirement for the tenant to contribute to the cost of the insurance premium, Master Marsh was satisfied that it was for the landlord to decide which additional risks - aside from those specified in the lease - should be covered by the insurance policy.  In any event, he found no obligation for the landlord to insure the tenant's business against loss.  In making its decision about the additional risks to cover, the landlord was "insuring its interests" and the Master pointed out that:

"…there is no obvious reason why, even if it were possible to do so, the [landlord] should wish to obtain cover against losses to the [tenant's] business.  Such losses are for the [tenant] to insure."

Rent suspension/cesser

It was clear to the Court that the tenant's obligation to trade was suspended during periods of lockdown, but there was nothing in the "keep open" covenant to suspend the tenant's obligation to pay rent.

The lease provided for the suspension of rent (or a "rent cesser") where the unit was damaged by an Insured Risk or if the centre was sufficiently damaged so as to affect the tenant's unit materially and adversely.  The Master could see no basis for construing the relevant provisions to apply in the event of the centre and/or unit being closed due to a legal requirement.

The tenant sought to argue that any dispute about the abatement of rent should be submitted for determination by an independent expert, but this was rejected by the Court on the basis that the tenant had already submitted to its jurisdiction.

Conclusion

The High Court was satisfied that the issues of construction which it had been asked to consider fell well within the ambit of typical issues for determination on an application for summary judgment.  The Master noted that there were no new principles of law and that the issues raised by the tenant could be resolved by applying the well-established principles which govern the construction of contracts and implication of terms.  He noted that:

"The context in which the claim is made does not entitle the [tenant] to contend that these principles are now part of an area of developing law.  Equally, the [tenant] is not able to point to any conduct on the part of the [landlord] that might be regarded as oppressive and that the claim has been issued prematurely."

The Master was satisfied that the landlord had discharged the burden of establishing that the rents were due and that the tenant had no real prospect of defending the claim.  Judgement was therefore awarded for the arrears claimed and interest at the rate specified in the lease.

Comment

Those landlords and tenants of commercial property who are still negotiating over rent arrears which accrued during 2020 will want to take note of this judgment, particularly in light of the government's recent call for evidence concerning these negotiations (see How will the commercial property market exit COVID-19 restrictions?, Emma Humphreys (charlesrussellspeechlys.com)

The Master made it clear that it is not the courts' role to examine the precise effect of the pandemic upon either landlord or tenant businesses.  There are also indications that the handling of such claims may now become more "routine".  For example, the claim here had not been transferred to the county court at the relevant time (January 2021) because of the possibility of tenants seeking to maintain defences based upon grounds arising from the exceptional circumstances created by the pandemic.  However, it seems that such claims will now usually be transferred to the lower courts.

Despite the success for the landlord here, landlords will want to take note of the importance of engaging with their tenants before issuing any claim - as well as undertaking a careful check of the relevant provisions of their leases.  For tenants, the judgment makes it clear that the courts are ready to accept these types of claim and that they intend to deal with them efficiently. 

Here, the tenant's efforts to stall this judgment - including an application to adjourn the hearing - were rejected by the Court.  This decision involved the Court forming a provisional view about the merits of the proposed amendments and whether there was any real likelihood of the tenant being able to formulate a defence that should be tested at a full hearing of the application for summary judgment.  The Master noted that there was some prejudice to the tenant in refusing to adjourn the hearing, but that an adjournment would also have been prejudicial to the landlord given that no payment of rent been made by the tenant for 12 months.   It had taken over 3 months for the claim to reach a hearing and the Master was conscious that an adjournment was likely to lead to further delay of at least 2-3 months.


This article was written by Emma Humphreys. If you have any questions or would like to discuss Rent arreas and how COVID-19 has impacted your business, please contact Emma or your usual Real Estate Disputes team member. 

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