Allyson Colby offers her analysis of the first major decisions on rent arrears arising due to Covid-19.
Key point
- The courts have ruled in favour of landlords seeking summary judgments for rent arrears in two decisions reached in quick succession.
On the face of it, the issues in Bank of New York Mellon (International) Ltd v Cine-UK Ltd and other appeals [2021] EWHC 1013 (QB); [2021] PLSCS 80 and Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863 (Ch); [2021] PLSCS 74 were straightforward. Were landlords entitled to summary judgment for arrears of rent that had accumulated during the coronavirus pandemic?
But Master Dagnall, who delivered the decision in Mellon, sensed that the parties were asking a more fundamental question. Should legal principles be adapted to shift financial burdens from tenants starved of cash during lockdown to those with deeper pockets, even though many of us rely on financial institutions for our economic well-being and pensions?
Code of Practice
The tenants’ reliance on the Code of Practice for Commercial Property, which was published in June 2020 and strongly encourages parties to reach agreements to deal with rent arrears, was misplaced. The Code is voluntary and, although remedies for the recovery of rent are currently restricted, the government’s measures do not stop landlords from obtaining judgments for sums owed to them.
Also, the government’s stance is clear. Businesses that can pay some, or all, of their rents should do so. In Commerz, TFS had not engaged with its landlord and, in Bank of New York Mellon, Cineworld, Mecca Bingo and Sports Direct did not try to claim that they could not pay their rents. And, although the court can stay claims for negotiation, and can require even unwilling parties to attend alternative dispute resolution hearings, it would be very unusual to do so where parties are seeking summary judgments in “open-and-shut” cases.
Cesser of rent
The leases contained standard cesser of rent provisions, which applied if the premises were “damaged or destroyed” by an insured risk.
The court cannot rewrite a contract to assist a party, and it was clear from the context that the insurance provisions protected “bricks and mortar” and were directed at “physical” damage – even though there was a “keep open” clause in the Commerz lease and the tenants in Bank of New York Mellon argued that, just as it is possible to argue that premises have been “damaged” by road closures that limit access to them, it could also be said that their properties had been damaged and were “unfit for use” as a result of the pandemic.
The pandemic was an unprecedented event and, if the words chosen by the parties cannot justify a construction because they do not deal with an event at all, the court cannot achieve the “desired” result by construction. Also, tenants can protect themselves by purchasing their own business interruption policies, without contravening provisions preventing them from insuring properties themselves.
Pandemic insurance
Commerz had actually insured against the outbreak of notifiable diseases and it was accepted that the landlords’ insurances in Bank of New York Mellon extended, in principle, to losses from the pandemic and ensuing Covid regulations. And, because the tenants had paid the premiums, they claimed (in reliance on Mark Rowlands Ltd v Berni Inns Ltd [1985] 2 EGLR 92) that the policies were effected for their mutual benefit and that they should be able to take advantage of them.
But the insurers did not have to pay out unless the cesser of rent provisions applied, and we have already seen that the provisions had not been triggered. The solution was for tenants to negotiate wider rent cessers, or to purchase their own business interruption policies.
Implied terms
The leases were detailed, professionally drafted documents. They did not appear to contain errors and contained provisions addressing the issues of insurance and cesser of rent. The court cannot imply terms that would fly in the face of express provisions and the tenants’ arguments came close to contradicting the terms of their leases.
Also, the conditions set out in Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2016] EGLR 8 were not satisfied. Implied terms were not needed to give the leases business efficacy and would not pass the “obviousness” test.
Kitchen-sink arguments
Ingeniously, the tenants in Bank of New York Mellon also claimed that their leases had been overtaken by short-term frustration, which had relieved them, temporarily, of their rental obligations. But, although he accepted that the doctrine of frustration is capable of applying to leases and that the pandemic and ensuing Covid regulations could qualify as a supervening event because the permitted uses under the leases had become impossible, Master Dagnall ruled that there is no such thing in law as temporary frustration.
Frustration does not suspend contracts. It terminates them – which, in the case of a lease, would deprive the tenant of the protection of the Landlord and Tenant Act 1954. But the doctrine did not apply to any of the leases in Bank of New York Mellon, given the expectation that the closures would be relatively short and the lengths of the terms still left to run on the leases.
Finally, the tenants’ inability to trade was an unexpected occurrence, and not a “partial failure of consideration”. And neither the pandemic nor the Covid regulations had suspended or released the tenants’ rental obligations by making payments of rent illegal.
Need for certainty
Master Dagnall’s 101-page judgment was careful and comprehensive. He sympathised with the tenants, but echoed comments made in TKC London Ltd v Allianz Insurance plc [2020] EWHC 2710 (Comm).
In times of uncertainty, the law must offer a solid, practical and predictable foundation for resolving disputes and the confidence necessary for an eventual recovery. Anything else is for parliament, and not the courts.
Allyson Colby is a property law consultant
