High Court sides with landlords in Covid-19 rent arrears cases

For the second time in one week, the High Court has found in favour of the landlord in a dispute around concerning payment of rent during the Covid-19 pandemic. The judgment in Commerz Real Investmentgesellschaft mbH v TFS Stores Limited was closely followed by the judgment in Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others. Both disputes were based on similar facts and arguments. In this insight we focus on the judgment in Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others and what it could mean for similar cases.

Background to the case

The judgment relates to a number of tenants (Cine-UK, Mecca Bingo and Sports Direct) whose cases, each based on a similar set of facts and circumstances, were heard together. The landlords brought a claim for rent. The tenants, who had been unable to trade (fully) during the Covid-19 lockdown periods, resisted liability for payment of rent during these periods. The landlords had the benefit of pandemic insurance, including loss of rent cover irrespective of damage to their buildings. 

The tenants’ arguments

The tenants each put forward a number of sophisticated arguments to support their claim that rent was not payable during the lockdown periods. We have summarised their main arguments and included the High Court’s take on these:

• The tenants relied on the Government's Code of Conduct for Landlords and Tenants (first published in June 2020). This encourages landlords and tenants to communicate and negotiate if rent difficulties arise during the Covid-19 pandemic. They argued the landlords were going against the Code by bringing the rent arrears claims and pressing for summary judgment. However, this argument failed on the basis that the Code is voluntary and does not alter tenants’ legal obligations, or provide a basis for rent not to be paid.
• As is the usual position, the rent cesser clauses in the leases would activate in the event of ‘damage or destruction’ to the premises. The tenants argued that this should be interpreted so that ‘damage and destruction’ included closure of the premises during the lockdown periods. This argument was rejected; closure of the premises needs to be due to physical ‘damage or destruction’, and there was no such physical damage in this situation.
• If the rent cesser clause could not be interpreted as put forward by the tenants, their leases included an implied term to the same effect. The court disagreed. The rent cesser clause clearly sets out the circumstances under which rent is suspended and the suggested implied term was not obvious or necessary to give the leases business efficacy.
• The landlords had the benefit of loss of rent insurance relating to a pandemic such as the Covid-19 pandemic. As a result, the tenants argued they should not be required to pay rent. This argument failed too, as the landlords’ policies were for their own benefit to insure against interruption of their business, rather than interruption of the tenants’ businesses. The tenants could have taken out their own insurance policies that would have covered them under these circumstances.
• The lockdown periods, and consequent closure of the premises, resulted in the leases being temporarily frustrated. The court accepted that the doctrine of frustration applies to leases as a matter of principle. It also agreed that an enforced closure such as that imposed by the lockdown restrictions could be capable in principle to give rise to frustration. However, the court noted that it would only have this effect in rare or very rare circumstances. In the context of the length of the disruption and the term remaining (especially considering the tenants had 1954 Act protection), the court did not find that the leases had been frustrated. In addition to this, the court found that there is no such thing as ‘temporary frustration’ in law. Frustration acts to terminate a contract and cannot be used to suspend it temporarily.
• Finally, the tenants argued that there is a principle of both contract and law that a party can be released from an obligation if it becomes impossible for the obligation to be performed legally. This too failed, as the obligation to pay rent had not become illegal. While performance of an obligation to trade from the premises could be excused due to illegality, this does not excuse the performance of another obligation (in this case payment of rent) that is not dependent or conditional on any other obligations.

Impact of High Court decision

The High Court’s decision in favour of the landlord is significant and will impact landlords and tenants alike. It is clear that its significance was in the court’s mind.  This is evident from the 100 page judgment which is detailed and considered.

The court expresses its sympathy for the tenants and acknowledges the difficult position that they have been in during the pandemic. However, the court’s analysis rests on the need for contractual certainty. Its judgment is underpinned by the notion that, to preserve legal certainty, contractual rights must be interpreted by applying settled principles to the contract in question.  Anything else is, in the court’s view, a matter for Parliament.   

The decision will be welcomed by landlords, particularly as all of the tenants’ arguments were comprehensively rejected as having no reasonable prospects of success. It remains to be seen whether any of the tenants will apply for permission to appeal.

It is worth mentioning that landlords and tenants should be aware of the impact of any proposals for restructuring on rent arrears claims. In the recent case of Riverside CREM 3 Ltd v Virgin Active Health Clubs Ltd, the High Court stayed the landlord’s rent arrears claim, because the tenant had proposed a restructuring plan under Part 26A of the Companies Act 2006 (as inserted by the Corporate Insolvency and Governance Act 2020) after the landlord’s claim had been issued.

The court ordered a stay as the interests of the wider class of creditors trumped the private interests of the landlord. In this case, it was clear that a majority of more than 75% of the tenant’s secured creditors would vote in favour of the restructuring plan. If the landlord had obtained and enforced judgment, it would have received substantially more than the other landlords in its class under the restructuring plan. 

What’s next?

Although the judgment in Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others has brought clarity, further changes may well be around the corner. Last month, the Government launched a consultation calling for evidence to establish how landlords and tenants are responding to the build-up of rent arrears during the pandemic.

This will in turn support the Government’s decision making on whether to release the current measures in place (the forfeiture moratorium and the restrictions on the use of the Commercial Rent Arrears Recovery (CRAR) procedure), or whether to replace them with new measures such as voluntary or compulsory non-legal adjudication of Covid-19 rent arrears claims. The consultation closed on 4 May 2021.

How can we help?

Now more than ever, specialist advice is important to navigate the maze of laws, regulations and procedural rules around landlord and tenant negotiations and disputes.

TLT’s transactional and dispute resolution real estate lawyers are experienced in the full range of landlord and tenant matters and remain on hand to assist at this time.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.