Covid rent arrears claims: Practical advice for commercial landlords and tenants

6th May 2021

David Manda and Lewis Couth, Walker Morris’ Real Estate Litigation specialists, explain recent High Court decisions concerning Covid-related rent arrears, and offer practical advice for commercial landlords and tenants.

High Court rules on high profile, high street Covid-related arrears claims

Commercial landlords and tenants alike should be aware of the High Court’s two recent decisions in claims brought by landlords against tenants Cineworld, Mecca Bingo, Sports Direct [1] and The Fragrance Shop [2], for rent arrears accrued during the Covid-19 pandemic.

In both cases, despite a plethora of arguments being advanced by the tenants, the landlords’ claims for rent and service charge arrears succeeded in full, and at summary judgment.

The cases clearly demonstrate that:

• whilst the UK Government has placed restrictions on some of a landlord’s more draconian remedies [3] during the pandemic, there are no Covid-related restrictions preventing landlords from suing for unpaid rent and service charge and from obtaining judgment on any valid claim; and
• summary judgment will, in many such cases, be a suitable procedure by which such claims may be quickly and cost-effectively resolved.

What legal and practical advice arises?

Looking at the largely standard-form terms within the various leases that were the subject of these claims, the High Court gave short shrift to all of the arguments advanced by the tenants in these cases.  Landlords and tenants should therefore note:

• A rent cesser (or, suspension) clause in a standard modern commercial lease should be construed, like any other contractual clause, by accepted principles of contractual interpretation and words should be given their ordinary, natural meaning. The phrase ‘damage or destruction’ within a rent cesser clause therefore means physical damage only, and should not be read more widely as if it also means economic damage resulting from the inability to trade due to the pandemic. Therefore, we would not expect standard rent cesser clauses to provide a defence to Covid-related arrears claims as they often require damage or destruction to the premises if they are to operate.
• Accepted contractual principles also apply when it comes to the question of whether or not a rent cesser clause can be implied so as to afford a defence to a Covid-related arrears claim. Those principles provide that a term should only be implied into any contract if a reading of the express terms reveals that implication of a term is necessary to give business efficacy to the contract [4].  That was not the case here.
• Although the landlords had insured against loss of rent irrespective of whether damage had been caused to their buildings, the rent in these cases was not lost (it simply had not been paid), and so the insurance policy would not bite.
• English law imposes a notoriously high bar before it will allow contractual obligations to be brought to an end via the doctrine of ‘frustration’ [5]. Frustration is particularly difficult to establish in the cases of leases because a lease affords a tenant the benefit of the demised premises whether or not the tenant wishes to make use of it, plus there usually remains the possibility of the tenant assigning or subletting.  In this case, frustration was impossible anyway, because the tenants’ period of enforced closure due to lockdown was temporary and it is not possible to have a temporary frustration – a contract is either frustrated or it is not.

• The Code of Practice for commercial property relationships during the Covid-19 pandemic is not binding in law.  Tenants cannot, therefore, rely on a landlord’s failure to follow the Code as a defence to a valid arrears claim.  Even where parties do comply with the Code, this may afford tenants some forbearance, but it will not remove the obligation to pay lease sums that are validly due.

In terms of practical implications, these recent cases are likely to encourage both parties to come to the table to negotiate.  The clear threat of summary judgment action should deter the ‘can pay, won’t pay’ tenants from being deliberately obstructive or evasive when it comes to paying arrears especially where the court has soundly rejected the numerous arguments in short space of time and at summary judgment level.

From a commercial perspective, the more collaborative approach of negotiating with tenants who are genuinely struggling as a result of the economic impact of the pandemic can result in both more flexible solutions than a court claim could allow, and it can bring about more and additional benefits for landlords in the long term (the fostering of positive landlord and tenant relationships, lower risk of forfeitures and voids, preservation of rental values and positive comparables, and so on).

Whilst there is little doubt that a mutually-acceptable negotiated solution is likely to remain the most commercially sensible option for both landlords and tenants in many cases, the landscape of post-Covid commercial lease remedies is in flux.  It will be interesting to see how the Government proceeds with the withdrawal or replacement of existing restrictions on landlord’s remedies, following its current call to evidence, which closed on 4 May 2021.  Walker Morris will monitor and report on any key developments.

How we can help

Walker Morris’ dedicated Real Estate Litigators are experienced and expert in acting for both landlords and tenants, and in resolving all types of commercial lease disputes.  If you would like any advice in connection with pursuing or defending a Covid-related arrears claim, or if you would like any assistance with the conduct or resolution of any commercial settlement negotiations, please do not hesitate to contact David Manda, Lewis Couth or any member of the Real Estate Litigation team.

[1] Bank of New York Mellon (International) Ltd v Cine-UK Ltd and related cases AEW UK REIT Plc v Mecca Bingo Limited and v Sports Direct.com Retail Ltd [2021] EWHC 1013 (QB)

[2] Commerz Real Investmentgesellschaft mbh v TFS Stores Limited [2021] EWHC 863 (Ch)

[3] such as forfeiture and the service of statutory demands to force payment under threat of insolvency

[4] M&S v BNP Paribas [2015] UKSC 72

[5] Frustration may occur where an unexpected event, that is the fault of neither party, takes place after the contract has been formed and is so fundamental as to go to the root of the contract and to render further performance impossible, illegal or radically different from that which was contemplated by the parties at the time the contract was made