COVID-19: Landlords granted summary judgment for unpaid rent

The key question in this case was whether tenants of commercial premises have remained responsible to pay their rents notwithstanding that they have been subject to the enforced closure of, or inability to trade from, their premises.  Despite numerous arguments put forward by the tenants, the court concluded the tenants had remained liable and granted summary judgment in favour of the landlords in respect of the unpaid rent.

This is an interesting case which sheds light on many of the discussions landlords, tenants and their lawyers have been having since the start of the pandemic. 

Background

The case concerned three applications for summary judgement against tenants for unpaid rent during the COVID-19 pandemic.  

The tenants and premises in question were:

• Cine-UK Limited which has a lease of a property at Hengrove Park, Bristol;

• Mecca Bingo Limited which has a lease of a property at East Thames Plaza, Dagenham; and

• SportsDirect.com Retail Limited which has a lease of premises at Woolworth Building, Bank Hey Street, Blackpool.

The landlords were Bank of New York Mellon (International) Limited and AEW UK REIT plc. A related claim in relation to a nightclub operator settled prior to the judgment being issued.

The differing views...

The tenants' position was that 'they, and the Leases, have been overtaken by wholly unforeseeable (including by the original parties to the Leases) events which have rendered the commercial purpose of the Leases temporarily (at least) impossible and unfulfillable'.  The tenants also argued that they had paid for loss of rent insurance and that this should cover the rent; if it did not this was the landlord's own fault and/or should be taken up with the insurer.

The landlords' position was that this is 'a matter of allocation of risk in relation to events which were (at least to a degree) foreseeable and where it was for the Tenants (or their predecessors) to negotiate provisions which would have resulted in rent cessation in these events'. Whilst acknowledging loss of rent insurance may provide some cover the landlord's argued it did not extend to covering loss of rent where there are no relevant rent suspension provisions in the leases and the relevant tenants can pay.

The key findings...

Rent suspension and insurance: Loss of rent insurance which had been taken out by the landlords was in place in relation to these leases and it was agreed between the parties that losses caused by the pandemic were covered by this insurance 'to at least some extent'.   However, the landlords argued, and the court agreed, that:

• the correct construction and interpretation of the 'standard' rent suspension provisions in these leases meant that even if an insured risk occurred the rent suspension provisions were only engaged where that risk caused physical damage to the property.  It was common ground that the pandemic had not caused physical damage to the properties.   

• the loss of rent insurance would only be triggered where the rent suspension provisions had been operated and the landlord had then suffered a loss of rent as a result of the  tenant's rent suspension.   As the rent suspension provisions were not engaged in this case there was no loss of rent for the insurance to cover.

An implied term: The court refused to imply a term into the lease which would see the rent suspended in relation to the COVID-19 pandemic for non-physical damage.  Whilst acknowledging this may have been fair and reasonable the court held that that the tenants had failed to show in the context of professionally drafted leases that the need for this term was either obvious or necessary for business efficacy. It was noted the leases work without the implied term and simply provide for rent suspension in some cases and not others.  

The court, although acknowledging the restrictions were 'unprecedented', was not convinced that 'COVID and the COVID Regulations were truly unforeseeable in the light of such matters as SARS'.  This was also a reason not to imply the term sought by the tenants.

The policy: The tenants also argued that they should benefit from any insurance obtained by the landlord for loss of rent.  They argued that if the policy did not cover the rent, it should have done so and the tenant's liability should only reflect what should have been the insured situation.  However, the court favoured the landlords' position that there simply was no loss of rent where the rent suspension clause did not operate and tenants remained liable to pay.  The business which was insured in relation to the loss of rent policy was that of the landlord and not the tenant. The court dismissed any suggestion a term should be implied into a carefully drawn insurance policy that cover would exist for the amount of rent in the absence of rent cesser. The court also commented that the tenants could have negotiated a wider rent suspension provision.

What's covered: The court also refused to find or to imply a term in the lease that if a landlord chose to insure a risk they should also obtain corresponding cover for the consequence of the risk occurring, ie loss of rent. The court favoured the landlords' position that the obligation to insure for loss of rent was driven by the rent suspension clause; this sets out whether or not rent is payable when an insured risk occurs and thus when the insurance need cover the rent.  In this case rent suspension was limited to physical damage. In terms of implying a term it was felt this was neither obvious nor necessary for business efficacy.

It was noted by the court that the insurance provisions are primarily for the benefit of the landlord and the fact that the tenant is paying for the insurance is part of the price being paid by the tenant for the grant of the leasehold interest, and it does not follow that because the tenant is the indirect payee then the insurance must be tailored to the benefit of the tenant as this implied term sought to do.  It was noted it was open to the tenant to complain about the terms of the insurance.   

Business interruption insurance: In relation to all the above arguments the court stated it was open to the tenants to take out business interruption insurance to protect themselves against lost turnover.   

The Code of Practice published in June 2020 (the Code): The tenants' position was that the landlords had refused to engage with the Code.  The tenants argued that there were strong public policy arguments in favour of landlords engaging and that the landlords' failure to do so in this case was a reason against granting summary judgment. 

The court rejected this position, noting that the Code was voluntary and that it stated it did not affect the underlying legal relationship between the parties.  Further, in this case the landlords were not members of any industry body which had signed up to the Code.  The court also highlighted that parliament had enacted various measures limiting the legal rights and remedies available to landlords but that there was no such limitation on suing for rent.  The court noted that a party is entitled to have its claim heard within a reasonable time under the European Convention on Human Rights and stated it would be very unusual for the court to require parties to negotiate in the case of a summary judgement where the basis for granting the application is that the claim is clear.

The court also referenced the provisions of the Code that state that 'where businesses can pay any or all of their rent, they should do so'.   No evidence was put forward by the tenants in this case to show that they could not pay.  The court rejected an argument that this should be linked to the turnover of the business.  The judgment noting that the Code was 'outside the litigation process and not applicable to these Tenants who are not said to be unable to pay'.

Frustration: The English doctrine of frustration operates to bring a contract prospectively to an end because of the effect of a supervening event. Whilst the doctrine of frustration can apply to leases, it was acknowledged it is a very rare for it do so and there was no prospect of the tenants successfully arguing for frustration in this case.  An argument put forward by one of the tenants involving a new concept of 'temporary frustration' (whereby the rent was suspended during periods of lock-down and enforced closures of the premises) was also dismissed.

A temporary suspension of obligations: An argument that COVID and the COVID Regulations were a supervening event which temporarily suspended the tenants' obligations to pay rent was dismissed.

Partial failure of consideration: The tenants argued that that the effect of their being unable to operate from the properties in accordance with the permitted uses resulted in a partial failure of consideration such as to relieve them from their liabilities to pay rent. Again this argument was dismissed, the court noting it did not consider this was a "partial failure of consideration", but 'rather simply an unexpected occurrence which means that the Leases are not (as) beneficial as the Tenants expected'. As had been referred in relation to previous arguments the court noted this was a contractual allocation of risk.  The leases dealt with circumstances in which the rent would be suspended through the rent suspension clause.

In addressing all of the above points the court was comfortable this matter was suitable for summary judgment.  It found that the tenants had no real prospect of defending the claims and there was no other compelling reason why they should be disposed of at a trial.

Comments

This is a very interesting case which provides guidance on questions raised by landlords and tenants since the start of the COVID-19 pandemic.  It will no doubt be relevant for a large number of landlords and tenants, particularly where negotiations are ongoing.  

It should be noted that the tenants have until 7 May 2021 to appeal.

Another decision in this area Commerz Real v TFS Stores [2021] EWHC 863 has also recently been handed down.  The landlord in this case was also successful in its application for summary judgment for unpaid rent and the court reached similar conclusions to the above.

Bank of New York Mellon (International) Ltd v Cine-UK Ltd and other cases [2021] EWHC 1013 (QB)