Leaseholder ordered to pay rent and service charge arrears despite lockdown

Out-Law Analysis | 26 Apr 2021 | 2:55 pm | 6 min. read

Landlords will welcome recent rulings by the High Court in London which have confirmed that they are, in most circumstances, entitled to recover rent and service charges owed to them by retailers whose shops have been closed as a result of coronavirus restrictions.

However, landlords are advised to think carefully before issuing court proceedings and to give consideration to all options available in the light of the overall creditworthiness of their tenant and their future relations.

Cross Siobhan

Siobhan Cross

Partner

Whilst a judgment for liability would be hard to resist in the light of these cases if a tenant could not make payment of rents, landlords still need to consider whether this will achieve the ultimate aim of securing payment

The first case

In the first reported case of debt proceedings relating to rent and service charge arrears accruing over the period of forced closure of a non-essential retail unit, the High Court rejected arguments which many landlords are facing where they bring seek to bring debt proceedings against tenants.

The claim was brought by Commerz Real Investmentgesellschaft, the leaseholder owners of the Westfield shopping centre in Shepherd’s Bush, London. It issued a claim in December 2020 for outstanding rent and service charges amounting to nearly £167,000, plus interest, against its tenant, the Fragrance Shop (TFS). Under the terms of a side letter agreed between the two parties, TFS was due to make monthly “base” rental and service charge payments to Commerz. It had not paid any rent for its premises since April 2020 and three-monthly service charge payments were also outstanding.

The tenant defended the proceedings on three grounds:

Firstly, the tenant alleged the proceedings were premature and/or not suitable for summary judgment as the landlord had not engaged with the UK government’s code of practice for commercial property relationships during the Covid-19 pandemic. However, the court found there was no evidence of non-engagement by the landlord and noted the code did not alter the legal relationship between the parties.

Secondly, the tenant argued that the debt proceedings took advantage of a ‘loophole’ in the law concerning enforcement of rent covenants. The court held that nothing in the relevant Coronavirus Regulations restricted the landlord’s right to bring debt proceedings, although the steps it can take if judgment is entered are restricted.

Thirdly, the tenant relied on the landlord’s obligations in the lease to insure the premises and the wider shopping centre and argued that there was an implied obligation on the landlord to insure against notifiable diseases and government action. However, the court held, based on the lease drafting, that any additional risks the landlord insured against beyond the specified insured risks was a matter for the landlord’s discretion and not subject to any objective reasonableness test. In this case the landlord had insured against notifiable diseases. However, the court made clear that the insurance was to cover the landlord’s and not the tenant’s losses and that as the ‘rent cesser’ provisions, as drafted, only applied where there was physical damage to the premises or the wider centre, they were not triggered by the pandemic-related forced closure of the shop and that the landlord therefore had no claim under its policy for loss of rent.

The second case

The second case encompassed three further summary judgment applications heard together in the High Court.. The landlords in the case had issued debt proceedings against their respective tenants, namely Cine-UK, a cinema operator, Mecca Bingo, a bingo hall operator, and the retailer, Sports Direct.

The court first rejected the argument that the UK government’s code of practice for commercial property relationships during the Covid-19 pandemic meant the cases should proceed to a full trial even where, as here, one of the landlords was said not to have been willing to engage in negotiations.

The main arguments the court had to consider were whether, as a matter of the construction, the rent cesser provisions in the leases were triggered by closure due to the pandemic and if not whether terms should be implied into the leases to achieve this, whether the rent should not be payable by the tenants given the landlords had insurance cover for loss of rent due to the pandemic, and whether the pandemic forced closures were events which caused frustration of the leases.

The court ruled that, the rent cesser provisions were not triggered by the pandemic, only by physical damage or destruction of the premises.

The court took account of the fact that pandemics and forced closures were not unforeseeable, noting the previous SARS epidemic, and that the landlords had in fact included cover for some losses arising from such causes. It also considered that it had been open to the tenants to take out business interruption insurance to protect themselves from potential losses. The court considered the allocation of risk in the lease made commercial sense.

Four further arguments were advanced by the tenants.

Firstly, they argued that the pandemic and forced closure of the premises were frustrating events which caused the suspension or termination of the leases. The court held the test for frustration of the leases, which required an unexpected event which sufficiently affected the contract so as to frustrate its purpose, was not met. It came to that view on the basis of existing case law, the 1954 Act protection enjoyed by all leases and the extant terms of the relevant leases of between 12 years and one year after the reasonably expected maximum period of forced closures of 18 months..

The tenants’ second argument was that these events caused a “temporary frustration” of the leases. The court held there was no authority for such a concept.

The third argument was that these events released the tenants from obligations which were illegal to perform, such as to trade. The court held that even if certain of the tenants’ obligations were rendered illegal this did not mean that performance of obligations that were not illegal, in this case to make rent payments, was excused.

Finally, dealing with the tenants’ argument that there had been a partial failure of consideration which relieved them of their liability for rent, the court held that whilst there may have been a partial failure of consideration this alone did not operate to relieve the tenants of the obligation to pay rent and the consequences of such a failure depended on what the contract provided for in such an event. The only relevant provisions were the rent cesser provisions which were not triggered. Therefore, based on the contractual allocation of risk, rent remained payable.

Impact on other cases and enforcement

These judgments have comprehensively dealt with and found against the defences many tenants are raising to claims for such arrears.

In the absence of any appeals against these judgements, or in the absence of what would be unusual drafting in other leases in relation to rent cesser provisions or some express allocation of risk between the parties which put the tenant in a better position than the usual lease drafting regarding circumstances in the nature of the forced closures the pandemic has led to, these cases provide some comfort to landlords who have struggled with rent collection over the last 12 months.

In none of these cases were there any submission by the tenants that they could not make the relevant rent payments. Whilst a judgment for liability would be hard to resist in the light of these cases if a tenant could not make payment of rents, landlords still need to consider whether this will achieve the ultimate aim of securing payment. Obtaining a judgment for outstanding arrears is not the end of the road – the court will not automatically enforce that judgment and it even has the power to pause enforcement.

Even if the judgment debt is ordered to be paid, the onus will be on the landlord to take further steps to consider the options available to enforce in the event of non-payment. That often means considering methods such as taking control of the debtor’s goods, securing a charge over land or assets or commencing insolvency proceedings – all of which attract their own separate rules and restrictions and all of which have different potential outcomes. The circumstances of each case will have to be considered carefully in the light of matters such as the tenant’s financial position, the amount in question and the implications on the ongoing landlord and tenant relationship.

If faced with a “man of straw”, issuing court proceedings in order to secure a judgment may serve only to throw good money after bad, leaving a fractured relationship as we move out of lockdown.

As to landlords’ other options, there remain measures in place restricting forfeiture for arrears of rent, recovering arrears through the seizure of tenants’ goods and the issuing of winding up petitions. The government’s call for evidence, which will inform its policy regarding the exit from those existing measures and any need for additional measures, closes on 6 May 2021. All eyes will be on further announcements.

Co-written by Siobhan Cross and Pierre Smith of Pinsent Masons.