Landlords victorious in COVID rent arrears case

Three commercial tenants, who claimed the closure of their businesses as a result of the COVID-19 pandemic justified the non-payment of rent, had their hopes dashed in a summary judgment handed down by the High Court in April.

In the second such case in as many weeks, the court decided that there was no justification under the law for the tenants (Cine-UK, Mecca Bingo and Sports Direct) to withhold rent due to their premises being closed during lockdown.

Aren’t commercial tenants currently protected against landlord legal action?
Commercial tenants are currently protected against eviction via lease forfeiture as well as the issuing of statutory demands or winding up petitions until 30 June 2021. However, this does not mean landlords have no recourse to other legal action to recover rent arrears.

In this case, the landlords (AEW UK Reit and Bank of New York Mellon) applied for summary judgment against the tenants for non-payment of rent. A summary judgment allows the court to make a decision on a case without a full trial, on the basis that the defendant’s claim has little chance of success.

The claims
The defendants used a number of arguments to justify their non-payment of rent, all of which were refuted by the Court.

  1. The government’s Code of Practice for the Commercial Property Sector justified the non-payment of rent published by the government in June last year, the Code provides guidance for landlords and tenants regarding commercial leases during the pandemic. The defendants claimed the landlords were violating the Code by claiming rent arrears, which they said went against the Code’s emphasis on communication and encouraging landlords and tenants to work together. The Court rejected the claim as the Code is voluntary and in no way alters the legal liabilities of each party.
  2. The ‘rent cesser’ clause in the tenants’ lease enabled them to lawfully withhold rent. A rent cesser clause contains precise terms describing the situations in which a tenant may lawfully not pay rent – in this case, if the premises becomes unusable due to physical damage to the property. The defendants suggested the clause had an ‘implied’ interpretation that applied to business closure during the pandemic. There was no physical damage to the defendants’ respective premises, the Court said, and there was no term in the rent cesser clause that applied to business closure, implied or otherwise.
  3. The tenants paid for the landlords’ insurance premiums, and so should not be required to pay rent. The landlords benefited from loss of rent and business interruption insurance. The tenants argued that the landlords would therefore be covered against loss of rent – and as they paid the premiums, they could legitimately withhold rent payments. The Court stated that a landlord cannot claim back lost rent if this stems from the tenant’s refusal to pay it. It only covers lawful non-payment of rent or non-payment due to insolvency, for example. Meanwhile, a landlord’s business interruption insurance only covers the landlord’s business, not that of their tenants. Tenants can take out their own business interruption insurance, the Court continued, and it was not the landlord’s fault that they had not done so.
  4. The lease was temporarily frustrated due to business closure.

The defendants argued that their inability to open during the COVID-19 pandemic had led to a ‘temporary frustration of the lease’. Frustration of contract is a legal term referring to an event that, through neither of the parties’ faults, renders the contract impossible to perform.

The court ruled that the concept of ‘temporary frustration’ does not exist under English law. The lease is either frustrated and comes to an end, or it is not. The defendants’ claim was rejected on this basis.

No legal basis for the non-payment of rent
The judgment served as a reminder to commercial tenants that, while there may be certain protections in place to assist them during these difficult times, the legal position with respect to non payment of rent remains the same.

The report stated that it was the court’s job to apply the law, not reinterpret or change it according to the times we live in – that was the government’s role, it concluded.

If you are a tenant struggling to pay rent due to the ongoing impact of the pandemic, or a landlord seeking to recoup rent arrears from a commercial tenant, then communication remains key to a positive resolution.

It is also vital to seek advice from specialist dispute resolution lawyers, to ensure you fully understand the law and guidance relating to commercial property and leases as we make the transition out of lockdown.

To get in touch with our team, please contact us on 0344 967 2505 or email mail@woodfines.co.uk

-Claire Spencer 

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