05/05/2021
The government has introduced a number of emergency measures to temporarily prevent landlords from evicting business tenants who failed to pay their rent due to the pandemic. The main protection for tenants is provided by the Coronavirus Act 2020 with encouragement for landlords to be reasonable provided by the voluntary Code of Practice for Commercial Property Relationships.
These temporary protections, which currently end on 21 June 2021, have left many landlords feeling helpless in relation to bringing a claim for arrears due from tenants during this time. However, landlords may find some comfort in the recent High Court decision in Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd [2021] which is the first reported case on a landlord’s ability to recover rent and service charge during the Covid-19 pandemic.
Facts
The tenant, who operates as The Fragrance Shop (TFS) held a five year lease of a retail unit from the landlord (CR) in the Westfield Shopping Centre in London. During the pandemic, TFS was obliged by law to close its shop on four occasions between 26 March 2020 and 12 April 2021.
TFS failed to pay any rent since April 2020 and failed to pay the monthly service charge for April, May and June 2020. As a result, CR applied for summary judgment for the amount owing of £166,884.82.
In defending the claim, the TFS relied on the following clauses in the lease:
- A covenant by the tenant to keep open and actively trade, unless prevented from doing so because of damage by an insured risk, or because doing so would be unlawful. TFS contended that that a term could be implied that where the shop was forced to close due to a legal requirement, no rent was payable and therefore CR should claim under its insurance policy for the loss of rent.
- An obligation on the landlord to insure against listed insured risks “or such other risks as the landlord may consider it prudent to insure”. TFS argued that the landlord had an obligation to insure for loss of rent resulting from forced closures or denial of access due to notifiable disease or government action.
- Rent cesser provisions, which provided for the suspension of rent if the shop premises were damaged by an insured risk, or the centre was “so damaged as to materially and adversely affect the Premises”. TFS’s view was that the pandemic constituted an event that allowed for the suspension of rent under the rent cesser provisions.
In addition, TFS argued that CR’s claim for the non-payment of rent and service charge was made contrary to the Code of Practice for Commercial Property Relationships (Code of Practice), which requires landlords and tenants to work together during the exceptional circumstances of the pandemic.
Decision
The High Court found in favour of CR and granted summary judgment. The Court held that TFS’s objections failed for the following reasons:
- Keep open covenant. The Court took the view that the covenant did not imply a term not to pay rent as this would contradict the rent cesser provisions in the lease, which expressly stated when rent would be suspended.
- Insured risks. The Court rejected the argument that CR was obliged to insure against notifiable diseases or government direction. Aside from the named risks, the landlord could choose which risks to insure against but was not obliged to insure against the risk of the Covid-19 pandemic. The Court added that even if there was an obligation to insure against such risk, there was nothing in the lease that required the landlord to insure the tenant’s business against loss.
- Rent cesser provisions. The Court also rejected the argument that the pandemic constituted an “event” for the purposes of the suspension of rent and agreed with CR that rent suspension only applied where there was physical damage to the property, which was not the case here.
- The Code of Practice. The Court did not agree that the Code of Practice was vindication for tenants to avoid paying any rent. The Code clearly states that tenants are still liable for their payment obligations under the lease, unless they have renegotiated a different agreement with their landlord. In any event, CR had attempted to engage with TFS in accordance with the Code, before it started a claim as recommended by the Code.
Practical points
This decision is reassuring for landlords as it confirms that the emergency legal protections brought in during the Covid-19 pandemic do not exonerate tenants from paying their rent. For tenants, it is a warning that if they are unable to meet their payment obligations then they should negotiate terms with their landlord at the earliest opportunity. The comments about insurance are particularly helpful; a landlord cannot be expected to insure against a tenant’s business losses – the tenant should arrange its own business interruption cover.
The case highlights that both the Coronavirus Act 2020 and the Code of Practice do not affect the legal obligations between a landlord and tenant. It confirms that the Code of Practice does not vary or suspend the contractual terms of any commercial lease and most importantly, it cannot be used as a “get out of jail free” card.
For more information on this topic, please contact David Hobbs, Partner.
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