Unsuccessful Covid-19 defences to Commercial Rental obligations

Posted on 15th May 2021 |

Summary judgment granted in favour of landlord seeking to recover commercial rent during the COVID-19 pandemic

On 16 April 2021, the judgement in the case of Commerz Real Investmentgesellschaft mbh v TFS Stores Limited [2021] EWHC 863 (Ch) was delivered by Chief Master Marsh in respect of a landlord’s ability to take action for commercial rent arrears. This was the first judgement which addressed several issues raised in a tenant’s defence in relation to the UK government’s restrictions on the opening of commercial establishments during the period of the COVID-19 pandemic.

BACKGROUND FACTS

The leaseholder owner (the Claimant) of the Westfield Shopping Centre in London demised to the defendant tenant a Unit and Storage Area (the Premises) by a lease dated 10 July 2019, for a term of 5 years from 1 February 2019, and at an annual rent of £200,000 excluding VAT. On the same date, the parties entered into a side letter which provided that the definition of ‘Principal Rent’ in the lease was to be replaced with ‘the aggregate of the Base Rent and Turnover Rent’, and that the rent and service charge were to be paid by equal monthly payments in advance on the first of each month.

Due to the COVID lockdowns, the Defendant’s business was closed to the public on 26 March 2020 and remained closed until 15 June 2020. It was then closed again between 5 November 2020 and 2 December 2020 and from 19 December 2020 until 12 April 2021. The Defendant had not paid any rent for the Premises as per the side letter since April 2020, as well as the monthly service charge for April, May and June 2020.

The lease owner’s claim was for rents payable under the lease. The Claimant sought judgement for rent amounting to £166,884.82 (inclusive of VAT) and interest at the contractual rate.

THE TENANT’S DEFENCE AND THE COURT’S RESPONSE

The tenant’s legal representatives submitted five defence grounds in response to the landlord’s claim for rent, which were rejected by the Court. They were as follows:

The tenant said that the proceedings were premature because (a) the Code of Practice for Commercial Property Relationships During the COVID-19 Pandemic requires landlords and tenants to work together, (b) the tenant defendant had been a reliable tenant, and (c) the pandemic has created exceptional circumstances. Relying on the Code, the tenant said the claim should go to trial because of the Claimant’s conduct in failing to engage with the Code and to make a claim under its insurance policy on the basis that Covid-19 is a notifiable disease.

The Court found that the lack of engagement was on the Defendant’s part. Moreover, it noted that the key issue in a summary judgement hearing was whether the Defendant has a real prospect of defending the claim based upon its case that the Claimant had failed to claim under its insurance policy. The Court determined the tenant’s defence did not have a real prospect of success.

The tenant said that the claim seeks to circumvent the Government’s moratorium on to forfeiture, winding up and the CRAR proceedings where rent arrears are related to Covid-19. In this regard, the tenant said the Claimant was essentially using a loophole that goes against the intention of those measures.

The Court pointed out that although the Government has placed restrictions upon some remedies open to landlords, there is no legal restriction placed upon a landlord bringing a claim for rents and seeking judgment upon that claim. Although the steps a landlord could take to enforce such a judgement were now more limited, the landlord was nevertheless entitled to bring a claim for overdue rent.

The tenant argued the Claimant had breached its obligation under clause 5.2 of the lease where it covenanted to observe and perform its obligations under Schedule 3, which included an obligation to insure. Pointing to that obligation, the tenant said it was reasonable to expect that the Claimant would insure against loss of rent due to forced closures and/or denial of access due to a notifiable disease like COVID-19 and/or government action.

The Court observed that the obligations under clause 5.2 and the Schedules must be considered in light of the definition of Insured Risks in the Schedules. Since there was nothing in the definition of Insured Risks that refers to notifiable disease or government action, the Court determined that this defence was not likely to succeed. In this regard, the Court noted that the tenant’s defence did not address either the nature of the loss of rent the Claimant could, or should, insure against or how the rent cesser provisions in the lease should be construed to operate.

The tenant also argued that the Claimant’s insurance cover could be interpreted, or a term implied in so that it covered non-payment of rent arising from the impact of a notifiable disease. If the tenant could rely on this argument, arguably it would have a valid defence on the basis that the Claimant should have made an insurance claim instead of suin for the overdue rent.

The Court rejected this argument on the basis that the term said to be implied was not necessary to give business efficacy to the contract, i.e. there was no need to imply that term to make the insurance contract effective. Neither was it such an obvious term that its inclusion would have gone without saying, and neither would it have been reasonable or equitable to imply that term.

The tenant also sought to rely on the lease’s rent abatement clause that stated a dispute about the amount or period of the abatement of rent must be referred to an independent expert.

However, the Court ruled that the terms of the rent abatement clause were not triggered in this instance because rent cesser applied where there is physical damage to the Premises and there was no basis for construing that provision to apply when the Premises being closed due to a legal requirement.

The Court also noted that while normally if the rent abatement clause applied, the claim would be stayed pending expert determination; here, in any case, the tenant had not applied for a stay. Neither had the tenant dispute the Court’s jurisdiction to hear this case, and further, as the tenant had served a defence, there was no proper basis for granting a stay.

CONCLUSION

This case clarifies to both landlords and tenants of commercial premises that claims still lies for breaches of rent covenants, although the scope of enforcement may be restricted due to considerations relating to Covid. Currently, the ban on evicting commercial tenants expires on 30 June 2021. For residential tenancies, the ban on evictions by bailiff expires on 31 May 2021. These dates could be extended further depending on conditions due to the pandemic. However, as the Government has announced its roadmap for ending lockdown with providing for lifting all legal restrictions on social contact after 21 June 2021, it appears probably that no further extensions of those deadlines are being contemplated. With the passing of those deadlines (assuming no further extensions) claimants, both residential and commercial landlords, can likely again expect to rely on the full range of enforcement measures, including evictions, against errant tenants.