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Finally some good news for commercial landlords!

For over a year now, landlords have had their hands tied by the various restrictions hastily introduced by the Government at the beginning of the Covid-19 pandemic to protect tenan...

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Date: 04/05/2021

Authors:

Armel elaudais colour 2021

Armel Elaudais

Senior Associate
Kirsty smith colour 2019

Kirsty Smith

Associate

For over a year now, landlords have had their hands tied by the various restrictions hastily introduced by the Government at the beginning of the Covid-19 pandemic to protect tenants struggling to pay their rent. The only remedy that remained available to landlords was to pursue debt proceedings. While nothing in the Covid-19 legislation to date has had the effect of expunging arrears, this did not stop tenants from seeking to defend debt proceedings, raising a variety of arguments as why they should be relieved from their rent liabilities.

In not one but two long-awaited judgments, the Courts dismissed those arguments one by one, ordering summary judgment in favour of the landlords.

In Commerz Real Investmentgesellschaft mbh v TFS Stores Limited, the main arguments relied on by the tenant were:

  1. Code of Practice – The tenant argued that the landlord was in breach of its obligations under the Government’s Code of Practice for commercial property relationships during the Covid-19 pandemic by issuing proceedings prematurely rather than negotiating. The Court held that the Code of Practice does not affect the legal relationship between landlords and tenants (and guarantors).
  2. Circumventing Covid-19 legislation – The Court further dismissed the idea that by issuing proceedings the landlord had sought to circumvent other Government restrictions.
  3. Insurance and rent cesser – TFS claimed that as the landlord had an obligation to insure against loss of rent arising from an insured risk, it was reasonable to expect the landlord would insure against loss of rent due to closure forced by a notifiable disease, and the landlord should make a claim under its insurance policy for loss of rent. The Court rejected this. The landlord was not required to insure against losses to the tenant’s business. It could only make a claim under its insurance policy if the rent cesser clause was triggered. The Court found that this was not the case, as the rent cesser provisions only applied to instances of physical damage to premises, and there was no basis for construing these provisions more widely. As a result, the rent remained payable.

Similar arguments were considered in Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others. In this decision, the Court actually considered three separate cases, which were heard together as they broadly covered the range of arguments we have seen being put forward by tenants in defence to landlords’ claims. In a very detailed (99 pages long) decision, the Court dismissed each of those arguments:

  1. Rent cesser – As in the TFS case, the Court was not persuaded by the tenants’ argument that “damage” should be construed widely to include economic damage/inability to trade. The reference in the leases to the fact that rent would be suspended until the property had been “rebuilt” or “reinstated” was particularly relevant, and the Court considered that it would be a “considerable stretch” to extend damage to non-physical damage.
  2. Implied term – Failing to construe damage more widely, the tenants contended that terms to the effect that rent should be suspended in case of economic damage/inability to trade should be implied into the leases. The Court however found that to imply terms to that effect, to extend the rent suspension provisions, would contradict the express terms of the leases. The leases had been professionally drafted and apportioned the risks between landlord and tenant. It was also open to tenants to take out business interruption insurance, so there was no need for an implied term.
  3. Insurance – Again the arguments were similar to those considered in the TFS case and were dismissed for the same reasons.
  4. Frustration – Frustration is a doctrine which provides that where a wholly unexpected event occurs which affects a contract so as to negate its purpose, then the contract will be discharged and terminated. The tenants argued that lockdown was a frustrating event, so that the leases should be treated as suspended or terminated. The Court dismissed the idea that there can be a “temporary” frustration; a contract is either frustrated or not. The Court acknowledged that the Covid-19 pandemic and lockdowns were unprecedented, but this was not sufficient to frustrate the leases. Emphasis was placed on the length of the term of the leases, relative to the temporary disruption by lockdown. In each of these cases, the leases had at least a year left to run (with the right to be renewed under the Landlord & Tenant Act 1954) and that was not considered sufficiently short to result in the leases having been frustrated.

Conclusion
There remains to be seen whether the tenants will appeal these decisions. But in the meantime, landlords will be relieved that tenants are now unlikely to be able to successfully defend debt proceedings for arrears during the pandemic, and that they may not have to go to a full trial to get a judgment in their favour.

Whilst the current restrictions on forfeiture, CRAR and statutory demands are due to expire on 30 June 2021, it remains to be seen what will happen when these restrictions are lifted. The Government has called for evidence to support its decision-making on the best way to withdraw or replace the current measures, and it seems likely there will be a phased rather than an immediate withdrawal. For now, landlords would be well-advised to press on with proceedings and applications for summary judgment.

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