UK Real Estate Insights
Lockdown rent arrears remain due from commercial tenants: the decision in Commerz Real Investmentgesellschaft mbh v TFS Stores Ltd  EWHC 863 (Ch)
UK & Europe
UK Real Estate Insights
This is the second reported judgment on COVID rent arrears, handed down shortly after the decision in Commerz Real Investmentgesellschaft mbh v TFS Stores Ltd  EWHC 863 (Ch). This case was, in fact, a number of cases all heard together as the court had, rightly, identified that similar issues would be raised in each one. This judgment has been eagerly awaited as it dealt with the most common defences to "COVID debt" that have been raised by commercial tenants.
As with the TFS Stores case, the Landlords were making an application for Summary Judgment against the Tenants for rent – without the need for a full trial. The Tenants did not need to "win" to defeat the application – they simply needed to show that they had a real prospect of defending the claims, or that there were other compelling reasons for there to be a full trial. The Tenants sought to argue that the fact that these arguments were being rehearsed between landlords and tenants up and down the country meant that full consideration of the issues at a full trial was needed. The judge bore this in mind, but proceeded to award summary judgment in any event.
There were 5 central issues to be decided:
In an opening remark, the judgment notes that the Code “strongly encouraged landlords and tenants to communicate and negotiate ameliorative measures for tenants including rent-free periods and moratoria." Recognising (i) the Court’s discretion to order a stay (pending negotiations); (ii) the expressly voluntary nature of the Code and (iii) its clear stance on not interfering with a tenant’s obligations under a lease absent successful (voluntary) negotiations, the arguments under this head were dismissed. The Code was regarded as being “outside the litigation process and not applicable to these Tenants who are not said to be unable to pay.”
As in the TFS Stores case (our summary of which can be found here), the rent cesser provisions all operated to suspend a tenant’s obligation to pay rent if the premises were “destroyed or damaged by any of the Insured Risks so as to render the Property unfit for occupation or use”. Unlike the lease in TFS Stores there was no ‘keep open’ covenant to consider. Noting Chief Master Marsh’s ruling, Master Dagnall also came to a conclusion in favour of the Landlords that the rent cesser provisions cannot, on a literal interpretation, be read to incorporate the national lockdowns within the meaning of “damage or destruction”, notwithstanding in these cases the absence of the word ‘physical’ in respect of “the damage or destruction” specified in the rent cesser provisions.
The Tenants then argued that, even in the absence of “physical” damage or destruction, a full rent cesser should be implied in favour of the Tenants not paying rent in these circumstances, because (i) COVID and the COVID Regulations are unprecedented and unforeseen, and had forced the closure of the Premises and (ii) the Landlords had in fact chosen to insure their losses caused by a pandemic so that the Insured Risks did extend to Landlord losses, and had done so at the expense of the Tenants. In the context where the Leases (and the Insurance) provide for cover to include loss of Rent then the Tenant’s liability to pay rent should be suspended.
Master Dagnall disagreed; COVID and COVID regulations were not entirely unforeseen and unforeseeable, citing examples such as SARS and noting the availability to Tenants of business interruption insurance to cover notifiable diseases and their rental liabilities during such periods. Following a comprehensive review of the “clear and consistent” legal principles, extending the scope of the rent cesser clause was considered to be neither obvious nor necessary on account of business efficacy. It simply is not clear that the response from a hypothetical landlord and tenant (to the officious bystanders’ question) would be that the implied term sought would “go without saying”. Likewise, it could not be argued that the Leases do not ‘work’ without the term being implied.
Similarly to Chief Master Marsh, Master Dagnall highlighted that mitigation and management of risk is something which each party should consider for itself. Whilst the Landlords’ policies included cover for loss of rent caused by the pandemic regardless of any physical damage, it still was not clear in what sense (if any) rent was lost under the Leases. The rent cesser clauses did require physical damage or destruction to suspend the Tenants’ rent obligations; without it they could not argue that the Landlords should claim under insurance for rents they squarely owe.
The Tenants raised a further argument by implication: that by contributing to the insurance obtained by the Landlords, the Landlords had to ensure that the Tenants could rely on cover for losses suffered upon closure of the Premises because of COVID – the very risk the Landlords had elected to obtain extra insurance for. Again, the Court was not convinced that the Tenants could show either (or both) obviousness or necessity for business efficacy for such a term to be implied, and the arguments failed.
Whilst none of the Tenants contended that the leases had been (entirely) frustrated by COVID and the COVID regulations, an argument was raised that there had been a ‘temporary frustration’ during the national lockdowns, resulting in rents not being payable during this time. Whilst somewhat novel in comparison to the arguments advanced in the TFS Stores case, Master Dagnall found that there was no such thing as a ‘temporary frustration’ in law which could lead to a suspension of contractual obligations for a period of time only.
Whilst many authorities were cited and recognised to support a contention that a contract may in effect be frustrated altogether if an obligation is suspended for long enough (for example due to illegality), the judge distinguished the instant case on the basis of the practical effects of the closure: the Leases all had in excess of a year left to run, with security of tenure under the 1954 Act. Both frustration and suspension arguments therefore failed.
It will be challenging to argue that Master Dagnall left any stones unturned in this judgment. The reasoning and engagement with the submissions was forensic, running to over 100 pages.
It is not yet known whether any of the Tenants will seek to appeal.