Second Judgment in favour of Landlords on Commercial Rent Arrear dispute involving Covid-19 issues

27 April, 2021

On 16 April 2021, Chief Master Marsh in Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd ordered in favour for the landlord during the first judgment on commercial rent arrears dispute involving Covid-19 issues. Under a week later, on 22 April, we already have another judgment from Master Dagnall who has also found in favour of  landlords in the case of Bank of New York Mellon (International) Ltd and another v Cine-UK Ltd and others.

This case involved claims for rent arrears owing to two different landlords which were opposed by tenants on a number of grounds, all of which were rejected by Master Dagnall. The tenants in this case were Cine-UK Ltd, Mecca Bingo Ltd, SportsDirect Ltd, and Deltic, a nightclub operator. These tenants had been unable to trade, to various degrees, during the Government imposed lockdowns.

The tenants’ arguments and the reasons they were unsuccessful are dealt with below:

 

Tenants’ arguments

The rent cesser clauses were triggered so that rent ceased to be payable, at least whilst the premises were or had to be closed. Rent cesser clauses in leases suspend the tenant’s obligation to pay rent in the event that the premises are physically damaged or destroyed.  The tenants argued that the words “damage or destruction”  should be construed to include an inability to trade.

 

Reasons they were unsuccessful

Rent cesser clauses were not triggered as “damage or destruction” should be given its natural and ordinary meaning which therefore only included physical damage.

Tenants’ arguments

As an alternative to the construction of argument 1, the tenants argued that terms to the same effect should be implied into the lease.

 

Reasons they were unsuccessful

There was no need for an implied term as the pandemic and lockdown, although unprecedented, could hardly be said to be unforeseeable (noting for example the SARS epidemic two decades previously).

Tenants’ arguments

The Landlords had been able to procure pandemic insurance, which included loss of rent, irrespective of damage to their buildings. The tenants’ argued that the landlords have an obligation to resort to their building insurance to recover losses of rent and for that reason, the tenants should not have to pay the relevant rent.

 

Reasons they were unsuccessful

Landlords had prudently insured their “bricks and mortar” and it had been open to the tenants to similarly take out business interruption insurance. 

Although the landlords’ policies did include insurance against loss of rent in the current circumstances, whether or not there was any physical damage to the premises, the Landlords did not have an obligation to resort to it as the rent had been “lost” because the rent cesser (argument 1) had not been triggered.

Tenants’ arguments

The tenants sought to argue that there was a “temporary frustration” of the lease over the periods of lock-down and enforced closures of the premises, resulting in rent not being payable for such periods that lockdown. Frustration arises where an event occurs, after contract formation, which is beyond the parties’ control rendering it impossible to perform the contract. Alternatively, it could be where the relevant obligation is transformed into a radically different obligation from what was contemplated at the time the contract was entered into.

The tenants argued there is a principle of contract, and of law, that a party can be released from an obligation where it is becomes impossible for it to be performed legally.

Additionally, the tenants argued that the effect of their being unable to operate from the premises in accordance with the “Permitted Uses” in the leases results in a partial failure of consideration to relieve them from their liabilities to pay rent.

 

Reasons they were unsuccessful

For frustration, the question was, whether the situation had become so “radically different” so that it was outside what was the reasonable contemplation of the parties as to render it “unjust” for the leases to continue. Master Dagnall concluded that it had not. In order to determine this, Master Dagnall took into consideration the term, the period of disruption and the remaining term of the leases to calculate the mathematical effects regarding the proportion of the contractual terms which were “lost” due to closures.

The higher the proportion, the more unjust and the closer to satisfying the frustration test. Master Dagnall noted that the period of disruption was not more than 18 months for any of the tenants, that all leases had more than one year left to run and had 1954 Act protection (tenants had an automatic right to a lease renewal).

Master Dagnall noted that the 1954 rights were valuable and those rights would be lost if the leases were frustrated. Master Dagnall also noted that there was no such thing as a “temporary frustration”, effectively suspending the contract for a period of time.

As to the illegality argument, Master Dagnall noted that whilst this was an excuse for one obligation (i.e. not to open) it does not itself relieve liability to pay rent.

In relation to the failure of consideration argument, Master Dagnall did not consider that the tenants being unable to trade in accordance with the Permitted Uses was really a “partial failure of consideration”, but rather simply an unexpected occurrence which means that the leases are not (as) beneficial as the tenants expected and this was no fault of the landlords. Master Dagnall said that the leases did not provide that the rent was dependent upon the tenants being able to enjoy such use, except in the limited circumstances of the rent cesser clauses (which he had held did not apply – argument 1)

Tenants’ arguments

Summary judgment is available in court proceedings where it can be shown that there is no reasonable prospect of success and there is no other reason why the case should be allowed to proceed to a trial.

The tenants argued that the cases were unsuitable for summary judgment as the claims involved technical and complex defences which warranted full trials at later dates. 

 

Reasons they were unsuccessful

No further evidence was going to be needed to better inform a Court at a trial and the parties had had ample time for preparation. There was a public interest in a summary decision (i.e. quicker decision). In the circumstances, Master Dagnall ordered that none of the parties were prejudiced by having the cases decided on a summary judgment application.

Tenants’ arguments

The Code of Practice encourages collaboration between landlords and tenants and suggests that landlords should make concessions on rent payments where they can. The tenants argued that the landlords had not complied with the Code of Practice and should not have commenced debt proceedings for the rent arrears in the first place.

 

Reasons they were unsuccessful

The code is voluntary and does not change the contractual relationship between landlords and tenants. Master Dagnall noted that the Government had already specifically enacted limitations on other landlord remedies and there was no such limitation for debt claims.

In this case, the tenants employed every possible Covid argument to justify non-payment of rent and each one was resoundingly rejected by the Courts. This should provide some comfort to landlords in their rent collection endeavours going forward.

The full judgment can be found here

If you have questions about this case or about your own commercial rent arrears, please get in touch with Nitej Davda or Elena Chrysostomou