Guy Fetherstonhaugh QC and Elizabeth Fitzgerald share their thoughts on a pair of cases that show that commercial tenants who decide not to pay their rent can no longer plead the pandemic.
On 16 March 2020, the prime minister made a televised address to the nation in which he urged the public to work from home if possible, and to avoid visiting social venues such as pubs, clubs or theatres. Four days later, the government announced the closure of non-essential retail, leisure and hospitality venues. This was given legislative force the following day by the Health Protection (Coronavirus, Business Closure) (England) Regulations 2020. From that day, many retailers and entertainment venues were unable to open for business.
Sensing that such businesses would cease paying rent, and that their landlords would take enforcement action, parliament responded by enacting the Coronavirus Act 2020, which provided, in effect, that business tenancies could not be brought to an end by forfeiture, including for non-payment of rent, for the period from its inception until summer 2021, while the Corporate Insolvency and Governance Act 2020 and regulations under it have effectively prevented the use of statutory demands and winding-up petitions based on non-payment of rent until summer 2021.
What’s left for landlords?
None of these measures prevented landlords taking proceedings simply claiming arrears of rent. Landlords whose tenants did not have the means to pay have, by and large, desisted, and have reached other accommodations with their tenants. But some landlords – whose tenants have the means, but not the inclination, to pay – have not been so forebearing, and have issued proceedings and then claimed summary judgment, on the footing that there is no realistic prospect of any defence succeeding. There are lessons to be drawn from the first two summary judgments, given in April 2021: the decision of Master Dagnall in Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021] EWHC 1013 (QB); and that of Chief Master Marsh in Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863 (Ch); [2021] PLSCS 74.
Commerz concerned one tenant operating as a perfumerie (TFS Stores) in a shopping centre. Bank of New York Mellon concerned a number of tenants who traded variously as a sports retailer (Sports Direct), cinema (Cine-UK), bingo business (Mecca Leisure) and nightclub (Deltic), whose cases the Master had considered were sufficiently similar to be heard together. These tenants, with separately arranged legal representation, put forward different arguments for resisting liability, although ultimately it was agreed that they could all rely on each others’ grounds.
Summary judgment?
The various rent claims considered by the courts were each defended on a number of different grounds, raising issues of apparent complexity. The relevant Civil Procedure Rule provides that the court may give summary judgment if (a) it considers that the defendant has no real prospect of successfully defending the claim and (b) there is no other compelling reason why the case or issue should be disposed of at a trial. The first hurdle facing the claimants in each case was whether the claims should be shunted off to a full trial, with all the attendant delay and cost (as the defendants contended).
Rejecting this, each Master observed that the applications did not raise any questions of fact which required a full trial; that the fact the leases before them contained standard form provisions in widespread use was not a bar to determination by summary judgment; and that given that the points before them had been very fully argued, and that it was of great importance for commercial landlords (and their investors) and tenants to know generally whether commercial rents are actually payable, the use of the summary judgment procedure was appropriate. The individual defences were therefore considered on their merits, as follows.
The relevance of government guidance
It was common ground that the tenants were compelled by the 2020 Regulations to close their premises to the public from 22 or 23 March 2020 to July 2020, with a further lockdown from 4 December 2020. Further, the government issued guidance in relation to the pandemic and its consequences including a Code of Practice, first published on 19 June 2020, and a further ministerial statement published on 9 December 2020 with regard to commercial premises and leases. These strongly encouraged landlords and tenants to communicate and negotiate ameliorative measures for tenants, including rent-free periods and moratoria. This, it was said, made it inappropriate for the claimants to insist on payment of full rents. Both Masters rejected this defence: the Code and statement were advisory and not compulsory, and were in any event careful to stipulate that “tenants who are in a position to pay in full should do so”. None of the defendants alleged that they could not pay their rents.
Interpretation of the leases
It was common ground between the parties that (a) the landlords had obtained insurance which extended in principle to loss arising from the circumstances of the pandemic and the 2020 Regulations and consequent effects on the various premises (expressly including loss of rent); (b) those losses became an “insured risk” within the meaning of the leases; and (c) the tenants were obliged to pay an insurance rent comprising a proportion of the amount spent by the landlords on insurance. It followed, so the argument for the tenants went, that they should be entitled to benefit from this insurance for which they had paid. The reason the masters each rejected this argument was that the pandemic had not caused the tenants not to pay their rents: they had chosen not to pay them. The only way in which rent could have been “lost” for these purposes was if the rent cesser clauses in the leases had been engaged – but they (unlike the insurance policies) operated only in the event of “damage or destruction” to the buildings. The tenants’ attempts to have that expression construed so as to apply to non-physical damage were rejected after a careful examination of the context.
Similar arguments in favour of implied terms were also rejected, on the ground that the suggested terms did not meet the required tests for implication. Master Dagnall also observed that, while the impact of Covid-19 had been unprecedented, it could not be described as unforeseeable. Indeed, the fact the landlords had insured against it was instructive, and there was no clear reason why the tenants should not themselves have taken out business interruption insurance policies, the availability of which had been highlighted by the recent litigation in Financial Conduct Authority v Arch Insurance Ltd and others [2021] UKSC 1; [2021] EGLR 12. In a telling phrase, the Master commented that “the insurance is primarily for the protection of the landlord as the full owner of the ‘bricks and mortar’… ie physical rather than ‘effects on trade’ consequences”.
Frustration
In the case of Bank of New York Mellon (but not Commerz), the tenants also argued in favour of a part suspension or temporary frustration of the leases during the lockdown periods. Having reviewed the law in some detail, Master Dagnall accepted that an enforced closure of the premises arising from matters outside the control of the parties such as Covid-19 and the 2020 Regulations is such a supervening event capable, in principle, of giving rise to the frustration of commercial leases, especially given that the use clauses only permit in practice what have become impossible uses. However, the master could not see the reasonably expected period of closures as ever having been any greater than 18 months, which compared favourably with the periods of the outstanding terms of the leases.
He considered that the practical effects of the closures were, in reality, not much different from those analysed by the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, although there the closure was more continuous, making it a stronger case. Moreover, there was no support for the tenants’ arguments based on a temporary suspension of the obligation to pay rent in the event of enforced closure – even in Commerz, where the position was more arguable, since the lease in that case contained a keep-open covenant.
No room left for tenants
Given the combined resources of the tenants, it can be expected that every single available argument that might be conceived of for non-payment of rent was deployed in these cases. The unhesitating rejection of those arguments, twice in one week, and at summary judgment level, will no doubt provide much comfort to landlords in a property market characterised by difficulties of rent collection over the course of the last year.
Guy Fetherstonhaugh QC and Elizabeth Fitzgerald are members of Falcon Chambers, and acted for the claimants in Bank of New York Mellon
