With or without Covid, the rent still needs to be paid

Posted:7th July 2021

Businesses beware, Covid-19 is not a defence for non-payment of your commercial rents.

In recent weeks, two High Court cases have found in favour of landlords where commercial tenants have failed to pay rent during the pandemic.

They are the first of what is expected to be many Covid ‘debt’ claims that could find their way through to a judgement in court, and the rulings set the benchmark position of the court as to how similar cases will be dealt with.

The findings by the High Court’s chief master Matthew Marsh provide much needed judicial insight into a landlord’s ability to recover rent and service charges due under a commercial lease during the past year – and which have not been paid as a result of the effects of the pandemic.

The court has ruled that commercial rent arrears were still due and owed by tenants, despite long closure periods and statutory restrictions on non-essential businesses due to Covid-19.The cases of Commerz Real v TFS Stores and Bank of New York Mellon (International) v Cine-UK Ltd were decided during the same week in April. They both concerned disputes relating to the non-payment of rent during the pandemic.

Commerz Real

In the case of Commerz Real, the High Court heard the collective case of a number of tenants, including Cine-UK, Mecca Bingo and Sports Direct, whose cases were based on a similar set of facts and circumstances.

A year of turbulent, stop-start business for the tenants led to non-payment of rent from April 2020. The tenants, who had been unable to trade fully during various lockdowns, failed to pay, arguing they could not afford it because of a lack of footfall. They further argued that the arrears claim made by the landlord was premature because they had not followed the code of practice for commercial property relationships during the Covid-19 pandemic, or the legislative restrictions on enforcement of lease covenants.

The tenants also argued that the landlord was obliged to utilise their insurance policy for loss of rent, with the landlord having the benefit of pandemic insurance, irrespective of damage to their buildings.

The High Court had no problem disagreeing with the tenants on both of their points. Firstly, it ruled that the code of practice did not have the effect of varying or suspending contractual terms. It stated that it was a voluntary code that did not change the tenants’ obligations to pay rent under the lease. And it found that, on the evidence, the landlord had engaged with the tenants, as specified by the guidelines.

Secondly, the court ruled there was no obligation for the landlord to look to its insurance first and, as there was no actual damage to the buildings (where the usual rent suspension clauses of the lease would come into effect), any landlord insurance claim would have failed anyway.

The court set out that the landlord had not taken advantage of a “loophole” in the law, as claimed by the tenants. It said, while the UK government had expressly suspended the ability of a landlord to exercise various legal rights during the pandemic, including a pause on court action, it had not altered the ability of a landlord to ultimately bring a claim for unpaid rent and service charges.

The future is clearer

In the Bank of New York case, the tenant arrears were outstanding from March 2020. Similarly, the various tenants had also been unable to trade during the pandemic.

The tenants raised a number of arguments relating to the code, such as implied lease terms, insurance, and that Covid was an event that temporarily frustrated the leases. The High Court rejected all arguments raised by the tenants, providing certainty as to the court’s position for any future tenant defences based on non-payment of rents resulting from the pandemic. While the court expressed its sympathy for the tenants and acknowledged the difficult position they had been in during the last year, its judgment and analysis upheld the need for contractual certainty.

What happens next?

While these cases did not deal with all the arguments that have been raised by tenants in defence of Covid-related rent claims, they should perhaps be viewed as a guide to the court’s attitude to such cases.

This, however, may not be the end of the story.

The government launched a consultation earlier this year calling for evidence to establish how landlords and tenants are responding to the accumulation of rent arrears during the pandemic.

The consultation will support the government’s decision-making on whether to release the current measures in place, or to replace them with new measures, such as voluntary or compulsory non-legal adjudication of Covid rent arrears claims. The consultation closed in early May and government is expected to release its findings in late spring or summer.

For legal advice about rent arrears, contact solicitor Gwen Jones, Director and Head of Commercial Property at EMG Solicitors, on 0191 731 4621 or at [email protected]