The Court of Appeal’s decision leaves tenants with only three options: pay, negotiate or arbitrate, write Guy Fetherstonhaugh QC and Elizabeth Fitzgerald.
When the government first announced the closure of all non-essential retail, leisure and hospitality venues in March 2020, many commercial tenants, deprived of their income, became unable to pay their rent. Others were able to pay, but decided not to do so, no doubt taking the view that the economic impact of the lockdown should not be borne by them alone. Landlords resorted to the one remedy left, following the enactment of the Coronavirus Act 2020, and issued debt claims. Tenants, keen to delay the day for payment, raised various inventive defences to such claims. Many landlords proceeded to claim summary judgment, on the basis that their tenants had no real prospect of successfully defending the claim.
The road so far
By April 2021, the first two reported Covid debt decisions had been given: by Master Dagnall, in the four combined claims in Bank of New York Mellon (International) Ltd v Cine-UK Ltd and other appeals [2021] EWHC 1013 (QB); [2021] EGLR 26, and Chief Master Marsh in Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863 (Ch); [2021] EGLR 25. These were followed, in September 2021, by the decision of deputy judge Robin Vos QC in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2021] EWHC 2591 (Ch); [2021] EGLR 43. The tenants’ various defences were rejected by all three judges.
Also in April 2021, the government issued a “call for evidence” and sought views as to the best way to exit from the Covid measures it had imposed, and what mechanism could be adopted to resolve the continuing disputes as to relief from rent arrears. By 9 November 2021, the Commercial Rent (Coronavirus) Bill 2021-22 had been introduced. The Bill received Royal Assent on 24 March 2022.
Meanwhile, one of the tenants in Bank of New York Mellon and the tenant in Trocadero were given permission to appeal.
The arbitration scheme
The Commercial Rent (Coronavirus) Act 2022 permits landlords and tenants under business tenancies to refer to statutory arbitration the matter of relief from payment from protected rent debts, ie unpaid rent where the premises or the tenant’s business, or part thereof, was subject to mandatory closure and thereby adversely affected by coronavirus. Rent must relate to the “protected period”, beginning on 21 March 2020 and ending when the regulations providing for (a) the closure of the particular business or its premises and (b) restrictions on the operation or use of the business or the premises for the relevant sector were lifted.
A reference to arbitration must be made within six months beginning with the day on which the Act was passed – so by 23 September 2022.
Where debt claims were initiated on or after 10 November 2021, they will be stayed, if requested, to enable the matter of payment of a protected rent debt to be resolved by arbitration or otherwise. Landlords have accordingly held off commencing new claims or pursuing existing litigation, sitting tight while they wait for the expiry of the arbitration window. Tenants have been awaiting the Court of Appeal’s decision before deciding which way to jump.
The appeal outcome
Just as the deadline for a referral to arbitration is almost on us, the Court of Appeal has handed down judgment dismissing both appeals in Bank of New York Mellon and Trocadero ([2022] EWCA Civ 1021; [2022] PLSCS 125).
In both appeals the tenants sought to argue that, in respect of the periods when it was unlawful to operate their business, the tenants were relieved from the obligation to pay rent. It was said to be fundamental to the basis of the leases that the premises would be capable of lawful use, and the effect of the government regulations caused a failure of that basis. The tenants would therefore have a claim in unjust enrichment in respect of rent paid for the illegal periods. Alternatively, it was said to be an implied term that the tenant should be relieved of the obligation to pay rent where it could not lawfully use the premises. In Bank of New York Mellon, the tenant also said that it was relieved from the obligation to pay on a true construction of the rent cesser provision.
The court had little hesitation in rejecting the rent cesser defence: giving the words of the leases their ordinary meaning, any resort to the rent cesser required damage or destruction caused by an insured risk. Even though pandemic was one such risk, against which the landlords had insured at the tenants’ expense, the damage in question clearly meant physical damage, and not the sheer inability to trade. As for an implied term, the court concluded that both leases worked perfectly well without the terms sought and allocated the risk that the premises could not be used for their intended purpose to the tenant. A claim in unjust enrichment could not contradict the terms of the contract, and for a failure of basis to be made out, it was necessary to identify a “gap” in the contract. There was no “gap” in the leases, which contained a carefully worked out contractual regime for the allocation of risk and any proposed “failure of basis” would subvert that regime.
The road ahead
The Court of Appeal’s decision is the death knell for the Covid defences. Tenants must now either pay, negotiate or issue a referral for arbitration, if arrears fall within the ambit of the 2022 Act.
The government’s impact assessment estimated 15,500 businesses to be within the scope of the arbitration procedure, of which around 7,500 cases were expected to go to arbitration. So far there have been a mere three published awards. As 23 September looms closer – and bearing in mind a prospective applicant must notify the other party of their intention to refer a dispute to arbitration and wait until the respondent has had an opportunity to respond – the seven arbitration bodies approved by the secretary of state might have a busy summer.
Guy Fetherstonhaugh QC and Elizabeth Fitzgerald are barristers at Falcon Chambers. They acted for the landlords in Bank of New York Mellon
