Challenging claims of rent arrears post Covid-19

Background

This case primarily concerned an application for summary judgment by the claimant landlord, Commerz Real Investmentgesellschaft mbH (‘the claimant’), under CPR rule 24.2, issued on 3 February 2021 for rents payable under a lease of commercial premises. However, the court also heard an application from the defendant tenant, TFS Stores Limited (‘the defendant’) for an order adjourning the hearing of the claimant’s application, which was dismissed.

The claim dealt with a number of defences raised by tenants who argued rents due pursuant to commercial leases were not owing as a result of the Covid-19 pandemic. It also provided an opportunity for an examination of the Government’s Code of Practice for Commercial Property Relationships During the Coronavirus Pandemic (‘the Code of Practice’).

The facts

The facts of this case were common and landlords across the country will have experienced similar issues themselves over the past 18 months. Here, the landlord was seeking the payment of rent and service charge due to it under a lease of retail and storage premises let to the defendant at Westfield Shopping Centre in London.

The defendant had accrued arrears of rent and service charge since the first national lockdown due to the Covid-19 pandemic in March 2020, in the sum of £166,884.82. The claimant issued the claim on 3 December 2020 and the defendant filed a defence which raised issues resulting from the pandemic including store closures and reduced footfall.

The premises

The claimant is the leasehold proprietor of Westfield Shopping Centre, London. Pursuant to the terms of a lease dated 10 July 2019 (‘the lease’), the claimant demised to the defendant the premises known as Unit 1164 and Storage Area SO210 (‘the premises’).

Due to the effects of the pandemic, the defendant was obliged to close its business at the premises on 26 March 2020 following the measures contained in the Health Protection (Coronavirus, Restrictions) Regulations 2020 (SI 2020/350), and subsequently the Health Protection (Coronavirus Restrictions) (All Tiers) (England) Regulations 2020 (SI 2020/1374). The defendant’s business that was operating from the premises remained closed until 15 June 2020 and then closed again between 5 November 2020 and 2 December 2020, and again from 19 December 2020 until 12 April 2021.

The lease

Under the terms of the lease the defendant covenanted to pay to the claimant an initial yearly rent of £200,000 per annum excluding VAT. However, the parties also entered into a ‘side letter’ which contained a separate means of calculating the yearly rent by reference to turnover. Of more importance for this claim, the side letter provided for the defendant to pay the rent and service charge by way of monthly payments in advance on the first calendar day of each month.

The claim

The claim was for the rents payable under the lease in the sum of £166,884.82 inclusive of VAT and interest at the contractual rate. The defendant failed to pay the principal rent since April 2020 and the monthly service charge for April, May and June 2020.

The court found there were no material disputes of fact and the issue to be determined was whether the claimant should be granted summary judgment or whether the claim should proceed to trial.

The defences

The defendant filed a defence which raised issues relating to the Covid-19 pandemic and set out three grounds for defending the claim:

1. The defendant alleged the claimant had issued its claim prematurely and in contravention of the Code of Practice (‘the Code of Practice Defence’).

2. The defendant believed the claim was a means of circumventing measures introduced to prevent forfeiture, winding up and recovery using Commercial Rent Arrears Recovery (‘CRAR’) (‘the loophole defence.).

3. The defendant alleged the claimant was in breach of clause 5.2 in the lease which was a landlord’s covenant to and perform its obligations under Schedule 3, which included an obligation to insure the premises. The defendant averred that this obligation suggested it is reasonable for it to expect the claimant to insure against loss of rent due to notifiable disease and/or government action (‘the insurance/rent suspension defence’).

The judgment

The Code of Practice defence

The defendant argued the proceedings were issued prematurely “because the Code of Practice requires landlords and tenants to work together, it has been a reliable tenant and the pandemic has created exceptional circumstances”. However, the court pointed out that the Code of Practice did not serve to change the legal landlord and tenant relationship; rather it sought to promote good practice between the parties.

Although this defence was pleaded, counsel for the defendant did not maintain this defence during the hearing, instead choosing to submit that the claim should go to trial because of the claimant’s failure to engage with the Code of Practice. This was not made out on the evidence and, in fact, the court felt that, if anything, the lack of engagement was on the defendant’s side.

The loophole defence

This defence was readily dismissed by the court on the basis the government had not placed any restrictions on a landlord’s ability to issue proceedings for rent arrears, only on the steps the claimant might have been able to take upon receiving judgment in its favour.

The insurance/rent suspension defence

This element of the defence was the main issue of substance in the case. The court held the lease was clear. The obligation on the claimant to insure was limited to the named risks in the lease, but, even if there was an obligation on the claimant to insure against notifiable diseases or government action, the lease did not require the claimant to insure against the defendant’s business losses.

The court also held the rent suspension clause did not operate because there had been no physical damage to the claimant’s premises and any claim by the claimant under its own insurance would have been rejected by the insurer as the claimant had not suffered any loss. The court construed the wording of the rent suspension clause in the lease strictly, noting that the reference to ‘damage’ related to physical damage to the premises rather than just the forced closure due to the government’s restrictions.

The lease contained express terms which provided circumstances in which payment of the rent would be suspended. However, the defendant also argued there was an implied rent suspension clause in the lease, reinforced by the existence of a keep open covenant, that where the premises were closed due to a legal requirement, no rent would be payable and the landlord was obliged to claim on its own insurance for the loss of rent and the claimant could not seek to recover the arrears.

The court rejected the defendant’s suggestion there was an implied term in the lease suspending the payment of rent when the premises were closed because of a legal requirement. The judge felt that such a term directly contradicted the express terms of the lease which already provided circumstances in which payment of the rent would be suspended. Adopting Lord Neuberger’s approach in Marks & Spencer plc v BNP Paribas Securities Trust Co (Jersey) Ltd [2015] UKSC 72, Chief Master Marsh felt it could not be said the implied term was “so obvious that it goes without saying” and thus it could not be implied.

Commentary

The facts of this case were not out of the ordinary, but it was the first to test some of the creative defences raised by commercial tenants who have been unable to pay their rents as a result of the impact of the Covid-19 pandemic, while considering the role of the Code of Practice.

The decision usefully confirms the Code of Practice does not affect the legal relationship between landlord and tenant and should only be treated as a guide to help the parties take a balanced view. Importantly for landlords, the judgment confirmed the Code of Practice is not a charter for tenants to not pay rent. It is also worth noting that the claimant’s argument that it should be awarded summary judgment was deemed to have been strengthened by evidencing its engagement with the Code of Practice. This will be welcome news for landlords, some of whom have felt the Code of Practice is unfairly burdensome on landlords.

The judgment is also a good reminder that landlords and tenants have separate insurable interests. The tenant in this case was unsuccessful in arguing that it was reasonable for it to have expected the landlord to insure against its business losses. If tenants want to be insured against this type of loss, they would do well to arrange their own business interruption insurance.

In addition, the decision reinforces the fact that seeking to imply terms into a lease remains a difficult task. This was particularly so in this case where the parties had expressly allowed for situations in which payment of the rent would be suspended. For the tenant, trying to argue that an additional term should be implied, where one had not been expressly provided, was a bridge too far. This emphasises the importance of ensuring that when negotiating the terms of a lease, the parties are sure to expressly include any terms they might one day seek to rely on – although, an event such as the Covid-19 pandemic was not one that even the most well-advised landlord or tenant could have expected.

Finally, although tenants will be disappointed to see these defences fail, it does at least offer some certainty as to how the courts will deal with these types of claim, which may help facilitate settlement on an amicable basis without the need to involve the courts.