The COVID-19 pandemic has hit the commercial property sector hard. With many tenants unable or unwilling to pay the full rent, official guidance has encouraged parties to negotiate and agree a middle ground for rent collection. What happens if this is not possible?
In two key cases, the courts have signalled that tenants remain liable for the full contractual rent notwithstanding the pandemic, and landlords can obtain judgments for outstanding rent. We explore the key points for landlords to consider when looking to recover rent arrears during this time.
"In times of uncertainty the law must provide a solid practical and predictable foundation for the resolution of disputes and the confidence necessary for an eventual recovery… Contractual rights are to be evaluated by applying settled principles to the contract in question. Legal certainty remains paramount and gives the surest basis for resolution."
1. You can still seek a court order for the outstanding rent…
From early in the pandemic, there has been legislation in place which prohibits many of the usual rent recovery options familiar to landlords. Until 30 June 2021, the following are unavailable: forfeiture, Commercial Rent Arrears Recovery ('CRAR'), service of statutory demand and winding up a tenant company.
However, landlords have always been able to issue a claim seeking a court judgment against a tenant (or guarantor) for the unpaid rent. In light of the unusual circumstances, however, many tenants have argued that the rent should not be payable in full. Two recent cases have now confirmed that the contractual liability is unaffected by the pandemic - the rent under the lease remains due to landlords.
2. …and the courts have signalled that COVID-19 is unlikely to reduce the rent owed
The two High Court cases are:
- Bank of New York Mellon (International) Ltd and others v Cine-UK Ltd and others  EWHC 1013 (QB)
- Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd  EWHC 863 (Ch)
In the second case, a number of claims were heard together as the factual matrix remained the same: the landlord had issued a claim for outstanding rent (and, in some cases, service charge) against tenants who had not paid the rent in full or sufficiently since March/April 2020. Several tenants had been forced to cease trading under the legislation put in place as a result of the pandemic.
The tenants were variously Cineworld Cinemas, Mecca Bingo, Sports Direct and a nightclub. They raised various unsuccessful grounds of defence, including:
- The landlord had failed to engage with the Code of Practice for Commercial Property Relationships, and had brought the claim too soon;
- The landlord should instead claim on its insurance for loss of rent rather than pursuing the tenant;
- Arising from the 'keep open' covenant in the lease, there was an implied term that where the premises were closed due to a legal requirement, no rent was payable;
- Where the lease allowed for the cessation of requirement to pay rent in circumstances of damage or destruction to the premises, COVID-19 was sufficient to trigger this clause as 'damage or destruction' could cover the inability to trade; and
- COVID-19 was a frustrating event, so the leases should be treated as suspended or terminated (so that no rent was payable).
All of these arguments failed. Significantly, the court did not allow the tenants to get to trial, instead granting the landlords the order they sought as a summary judgment, on the basis the tenants' various defences had 'no reasonable prospects of success'.
3. There could be more arguments to come (but are they likely to be more successful?)
Whilst these cases bring welcome clarity, landlords should not assume their claims for unpaid rent will now be readily conceded by tenants. Putting aside the prospects of an appeal by the tenants, there are further arguments that could be made arising from individual wording of leases.
Further, the court made clear it had sympathy for the tenants' position during the pandemic. However, its approach was motivated by the need to ensure there was legal certainty to resolve contractual disputes. It is now up to Parliament to change the court's approach by passing new legislation, if it so wishes.
4. What should be a on a landlord's checklist?
Taking into account the recent caselaw, and the current legislation in place, here are key points for a landlord to consider when rent is unpaid:
- Many traditional rent recovery options remain prohibited until 30 June 2021 (there has been no confirmation as to whether this period will be extended);
- Engage in the Code of Practice, but be aware that the Code is voluntary and does not change the underlying legal relationship and obligation to pay rent;
- Therefore a claim for rent arrears can be issued if satisfactory agreement cannot be reached;
- Insofar as the tenant seeks to rely on a ground considered and dismissed by the courts, above, it will be difficult to sustain this defence and summary judgment should be sought; and
- This should be brought to tenants' attention in pre-action correspondence in order to minimise costs.
Keen to understand what this means for your property? Speak to Senay Nihat or Ryan Davies and find out how Gowling WLG can support you.