Commercial rent arrears payable despite COVID-19 pandemic

The COVID-19 pandemic and its consequences have had a turbulent effect on the retail, leisure and hospitality sectors in the UK. Government regulations in response to the pandemic have required tenants to close their premises to the public for long periods of time, causing profits to plummet, whilst landlords have been faced with rent ceasing to be paid and few remedies remaining available to them due to Government restrictions prohibiting leases being brought to an end by forfeiture for non-payment of rent and preventing the use of statutory demands and winding up petitions based on non-payment of rent until summer 2021.

There has been particular dispute and discussion as to upon whom (landlords, tenants and/or insurers) the burden of the financial detriment caused by the pandemic should fall. For this reason, the recent judgment in Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021] EWHC 1013 (QB) is important as it tackles head-on the thorny issue as to whether rent remains due and payable by tenants of commercial premises in spite of the circumstances of the pandemic.

What was the background to the case?

The landlords applied for summary judgment against the tenants in claims for rents due during the pandemic under three leases of commercial premises. The tenants were substantial commercial entities which ran cinema, bingo and retail businesses. Between March and December 2020, Government regulations meant that the tenants were required to close their premises and were unable to trade for certain periods of time. At other times during the pandemic it was legally permitted for the tenants to open, subject to complying with certain restrictions, but they took the view that it was not commercially feasible to do so.

The leases were in standard form, including a rent cesser clause to the effect that if access to the premises should be destroyed or damaged by specified insured risks so as to render them unfit for occupation or use, then the yearly rent should be suspended. Each lease required the tenant to pay a proportion of the premium incurred for the landlord’s insurance of the premises and the tenants had done so. The landlords had also taken out insurance policies which indemnified them in respect of loss of rent resulting from the interruption of or interference with the business following any human infectious or human contagious disease.

The tenants accrued rent arrears and the landlords brought an action for non-payment of the arrears.

What did the court decide and why?

The tenants put forward a range of different defences for not paying rent ,predicated on the basis that the terms of their leases had been overtaken by wholly unforeseeable events when they were forced to close their premises during the pandemic. However, each of these arguments failed, and the court granted summary judgment in favour of the landlords.

In very simple terms, the court decided:

1. The Code of Practice introduced by the Government on 19 June 2020 and subsequently updated on 6 April 2021, which strongly encourages commercial landlords and tenants to negotiate ameliorative measures for tenants, is voluntary. The Code clearly stipulates that tenants who are in a position to pay rent should do so, and that tenants continue to be liable for payment obligations under their leases, unless terms are renegotiated.
2. Standard-form rent cesser clauses in leases are typically triggered by an event which causes the relevant premises to be physically damaged or destroyed and that was not the case here. Closure and an inability to trade due to the pandemic does not constitute physical “damage” or “destruction”.
3. Further, it is not appropriate to imply terms into rent cesser provisions so as to interpret the operative words “damage” or “destruction” to include an inability to trade due to the pandemic. Whilst the pandemic was unprecedented, it was not wholly unforeseeable. Standard-form, professionally drafted documents are intended to cover the parties’ entire legal relationship. The leases included express rent cesser provisions which were limited to physical deterioration and therefore it was not necessary to imply any terms to give the leases business efficacy.
4. The landlords’ “loss of rent” insurance does not entitle tenants to withhold rent. Because the rent cesser clauses were not operative, the insurance policy did not compel the insurer to pay the landlords sums equivalent to the rent. The landlords were the insured parties and the policy provided for them to be indemnified against loss of rent, but they had suffered no loss. Nor did the fact that the tenants had paid for the landlords’ insurance premiums mean that tenants could expect insurers to pay for their rent.
5. Business interruption policies have been a standard feature of the insurance market for many years, providing a well-known means for both landlords and tenants to protect their business turnover against the inability to trade from their premises. A tenant’s failure to take out their own business interruption insurance did not mean they could rely on a landlord’s business interruption insurance policy, as that insurance is for the benefit of the landlord.
6. There is no such thing as a “temporary frustration” which effectively suspends a contract for a period of time. Frustration has the effect of discharging a contract and ending it. The tenants could not therefore argue that the pandemic temporarily frustrated their leases so that rent was not payable for periods when their premises were closed.

What are the practical implications of this decision for landlords and tenants?

Although the decision should be considered by landlords and tenants in the context of the particular terms of their leases, this judgment explores in detail nearly every conceivable argument for non-payment of rent during the pandemic and so the court’s unambiguous rejection of those arguments will no doubt provide comfort to landlords and encourage more proactive engagement from tenants in future rent arrears discussions.

It is not yet known whether the tenants will make any applications for permission to appeal the decision.

We also await with interest the outcome of the Government’s recent “call for evidence” on the withdrawal or replacement of the protections it has put in place to protect commercial tenants during the pandemic which expire on 30 June 2021, which could significantly change the situation for rent arrears again.

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