High Court rejects tenant’s “COVID19 defences” and enters judgment for pandemic arrears

High Court rejects tenant’s “COVID19 defences” and enters judgment for pandemic arrears

This article was published on: 19th April 2021

The decision in Commerz Real Investmentgesellschaft mbH v TFS Stores Limited [2021] EWHC 863 (Ch) is the first reported judgment on a commercial rent claim involving COVID19 issues.

The High Court granted the landlord’s request for summary judgment against the tenant for failure to pay rent and service charge accruing from April 2020.  In doing so, the court rejected the tenant’s three lines of defence which were argued, as follows:-

 

 

  1. That the claim was premature because the landlord had failed to comply with the Government’s Code of Practice for Commercial Property Relationships during the COVID19 pandemic;
  2. The claim was a measure designed to circumvent the Government’s prohibition on forfeiture, winding up, and recovery using CRAR and should not be allowed as it exploited a ‘loophole’; and
  3. The landlord was in breach of its obligation to insure the premises for loss of rent due to forced closures and/or denial of access due to a notifiable disease or government action.

Background

The tenant, trading as ‘the Fragrance Shop’, leased retail premises at Westfield in London.  It had failed to keep up with its rent and service charge since April 2020 citing difficulties in affording payment due to closures and lack of football caused by the COVID19 pandemic.

The landlord brought its claim for rent in the sum of £166,884.82 plus contractual interest under the lease.

Decision

Code of Practice

The court made short shrift of the tenant’s contention that the Landlord should not have issued proceedings and should have engaged under the voluntary code.  The court highlighted the fact the Code of Practice states explicitly that it does not affect the legal relationship between the landlord and tenant and does not alter the underlying contract.  The court held it was clear that whilst the Code encourages landlords and tenants to work together, the Code is not “a charter for tenants declining to pay any rent.”

It also held that in any event, it was not true that the landlord had failed to engage.  If anything, it was the tenant that had failed to participate in productive discussions.

Circumvention of COVID19 prohibitions

The court also rejected with ease the tenant’s argument that the landlord was exploiting a ‘loophole’ in the government measures designed to protect commercial tenants during the pandemic.  The court stated that none existed – the government had placed restrictions on some, but not all, landlord remedies for defaulting tenants.  Landlords remain able to bring claims to recover unpaid rent and seek judgment on that claim despite these restrictions.[1]

Insurance and rent cessor provisions

Under its third line of defence, the tenant argued that the landlord had breached its obligation to insure the premises because it was required to obtain cover for loss of rent related to the forced closure of stores due to a notifiable disease[2] and /or legal requirements.

Under the lease, the Landlord was obliged to insure against “Insured Risks,” which was not defined to include notifiable disease or legal requirements.  However, the landlord was entitled to insure against “other risks which it was prudent to insure against.”  In this case, the landlord had elected to insure against notifiable diseases where this caused physical damage to its premises.

The lease provided that rent would be suspended if the premises were damaged by an Insured Risk or if damage occurred which materially and adversely affected the premises.

The tenant was also obliged as a separate covenant to keep the premises open and to main active trading “unless prevented from doing so because of damage by an Insured Risk.”  If the premises were closed in breach of this clause, it was express that rent nonetheless remained payable.

The tenant argued that it could be implied into the lease that the landlord was obliged to insure for notifiable disease / legal requirements as it would ‘prudent and expected’ that it would do so.  It further argued that the rent cessor provisions could be construed as extending to the situation in which the premises were closed as a result of notifiable disease / legal requirements and not just where physical damage to the premises had been the result of those risks.   In that event, the landlord would be obliged to draw on its policy.

It was the landlord’s position that it was neither obliged to insure against COVID19 nor entitled to claim on its insurance policy in respect of those risks either.  Whilst the landlord had insured for loss of rent as a result of a notifiable disease, this was only for loss resulting from physical damage done to the premises and damage to the landlord’s business – not to the tenant’s.  Unless the rent cesser provisions were engaged, the tenant remained obliged to continue paying its rent so the landlord had not suffered any loss and could not make a claim under its policy.

The court distinguished damage to premises which forced shop closure from the situation in which other risks caused business interruption to be suffered by a tenant.[3]  In the former case, the landlord would generally be responsible to ensure appropriate cover was in place, as this protected its own business interests.  In the latter case, it was customary for tenants to arrange separate insurance cover if they wished to protect against the risk of their business being disrupted, as well as their legal liability to third parties in those circumstances.

The court found that there was nothing in the lease which obliged the landlord to insure against loss of rent caused by COVID19, or which suggested that the scope of the rent cessor provisions should extend beyond ‘damage’ of the premises to premises ‘closure’ due to that risk.  Any such provision would contradict the express terms in the lease and critically, such a term was not “so obvious it did not need to be said” to render it capable of implication.[4]

Whilst COVID19 had meant the obligation to keep open and trade had been suspended, there was no suspension of the obligation to pay rent – this was a different matter.

Comment

The decision is welcome news for commercial landlords, many of whom have lost out on rental income over the past year due to the forced closure of tenant businesses, which has seen many tenants unable or unwilling to maintain payments.

The judgment is also notably the first judicial comment on the effect of the Government’s voluntary Code of Practice in the context of litigation, the biting force of which has been questioned.  The case further serves an important reminder that the court will be slow to imply terms into a lease where it is not necessary to make sense of it.

The landlord community will be reassured that the court has confirmed they remain able to pursue money claims despite the other restrictions in force, where arrears have become unsustainable, or a landlord suspects a tenant is deliberately withholding rent it is realistically able to afford.  It remains to be seen, however, whether the judgment will motivate landlords to issue proceedings given the prospect of successful enforcement could remain in question.

[1] Certain methods of enforcement are subject to restriction and this is an important consideration for landlords in weighing whether to issue a claim.

[2] It is common ground that COVID19 is a notifiable disease.

[3] See the FCA test cases: Supreme Court hands down judgment in landmark Covid-19 business interruption test case

[4] Arnold v Britton [2015] UKSC 72; Marks & Spencer plc v BNP Paribas Securities Trust Co (Jersey) Ltd [2015] UKSC 72.

Author: Amy Light, Associate

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