Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others
The High Court has provided some much needed illumination on whether various arguments including rent cesser and frustration are credible defences to claims for rent arrears by landlords. These are arguments currently frequently raised by tenants to avoid paying rent during the period they were unable to trade during the Covid-19 pandemic.
In these three joined claims by two landlords for unpaid commercial rent, the three tenants who are household names, Cine-UK, Sports Direct and Mecca Bingo, contended that they should not have to pay the arrears due to the enforced closures of their premises as a result of the Covid-19 pandemic and subsequent Government lockdowns. All three were allowed to reopen at different periods in order to trade. However, some chose not to open for some periods, stating it was not commercially viable to do so.
The issue in this case was whether or not rent remained due and should have been paid, despite the circumstances of the pandemic. The landlords applied for summary judgment against the tenants, given the clear contractual obligations to pay rent under the leases.
The Defences Raised and the Court’s Findings
The tenants raised various arguments to avoid paying rent as follows, all rejected by the Court:
- Rent cesser
The tenants argued that the rents in their leases should have been suspended, as the pandemic and lockdowns caused “damage” within the meaning of the rent suspension clauses in their leases, which should then trigger the landlord’s insurance. The Court found that the references in the rent cesser clauses to “damage” and “destruction” were to a physical event. As no such event had been suffered by the tenants, the rent suspension clauses in the tenants’ leases had not been triggered.
- Implied terms
The tenants argued that during exceptional circumstances such as the pandemic, rent cesser provisions should be implied into the leases to suspend the obligations to pay rent. The Court held that although the pandemic was unprecedented, it was not wholly unforeseeable. The tenants had the ability to take out their own business interruption insurance policies. The tenants had engaged solicitors to ensure the leases were professionally drafted documents which appeared to intend to cover the parties’ entire legal relationship. Although it could be fair, reasonable or equitable to imply terms into the leases, as these leases included express rent cesser provisions which were limited to physical deterioration, it was not obvious or necessary to imply the terms sought by the tenants here to give the leases business efficacy.
- Landlord’s insurance
The tenants argued that, as the landlords had insurance policies in place for business interruption which would cover loss of rent, the landlord would be able to claim against those for tenants’ non-payment of rent, due to a pandemic being an insured risk. The Court found that the purpose of the insurance policies was not to protect tenants’ interests but those of the landlords and, even if the landlords had been able to recover loss of rent following non-payment from tenants, this benefit could not be passed on to the tenants given that there had been no rent suspension.
The tenants argued that their leases had been frustrated temporarily due to the pandemic and that lockdown constituted an unforeseen event which rendered it impossible for the lease obligations, such as the payment of rent, to be performed during the intermittent periods the premises were closed. The Court found that there is no such legal principle of “temporary frustration”. This is because frustration has the effect of terminating a contract once and for all when performance is no longer possible. It is not therefore possible to look to the law of frustration to suspend a contract for a period of time, such as the periods when the premises for these tenants were closed. On this basis, and given that the lease still had many years to run, the tenants’ frustration argument was rejected.
- The Government’s Code of Practice for commercial property relationships during the Covid-19 pandemic(the “Code”)
The tenants argued that the landlords had failed to comply with the Code, which encourages commercial landlords and tenants to attempt to resolve matters through negotiating rent-free periods amongst other measures. However, the Court confirmed that the Code was also clear that, where tenants were in a position to pay rent, they should do so. As the Code was aimed at tenants who could not pay their rent, which the tenants in these cases were not claiming, it was inapplicable to them. In addition, the Court highlighted the voluntary nature of the Code and that it was outside the litigation process.
- Suitability for Summary Judgment
In relation to the applications for summary judgment, the tenants argued that the landlords’ claims must be considered following a full trial and that these were not simple debt claims due, amongst other things, to the circumstances created by the pandemic. The Court held that the tenants had not shown any real prospect of success in defending the claims and there was no other compelling reason for there to be a trial. As such, the Court found for the landlords.
What does this mean for Landlords and Tenants?
With the extension of the restrictions on the enforcement of rent arrears until at least 20 September 2021, commercial landlords’ hands still remain tied in respect of enforcement action for commercial rent arrears. (Please see our previous blog). Although the outcome of these cases is not surprising to those who have been considering these issues during the pandemic, this case does give renewed hope to landlords battling tenants, who seem to be raising ever more complex arguments to evade paying rent arrears.
This decision is likely to be used by commercial landlords to encourage tenants raising similar arguments to pay outstanding rent. Equally, given that the forfeiture moratorium has been extended until 25 March 2022, commercial landlords may be emboldened to follow through by issuing proceedings for rent arrears against their tenants, safe in the knowledge that the Court is now less likely to find in a tenant’s favour. While there are many factors to consider before taking such action, a key factor for landlords (which historically has been the main consideration for landlords pursuing unpaid rent) is now likely to be whether the tenants can afford to pay the rent arrears.
On the other hand, although not unexpected, this decision will not be well received by commercial tenants able to pay their rent, who it is clear must bear the brunt of the closure of their premises during the pandemic. Whether the Government’s new arbitration scheme may even up the balance remains to be seen. Please see further details on this arbitration scheme.
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