Commercial rent — COVID-19 - tenants’ defences fail at first hurdle

Background

The past 18 months have been unprecedented in terms of challenges faced by commercial tenants. Many tenants who have had revenue streams cut - with their businesses closing during lockdown and then suffering from a lack of footfall after reopening, have simply not been in a position to pay their rent even with the continued support of the government. Whilst some larger institutional landlords have been able to accommodate their tenants’ requests for rent reductions / deferrals or a switch to monthly payments, other landlords have been unable or unwilling to do so.

Faced with mounting bills, decreasing revenues and offices they no longer need, many tenants have turned to their lawyers to see whether it is possible for them to escape liability under their lease. This ultimately led a group of tenants to run a number of creative arguments to defend rent claims commenced by their landlords. These claims were recently heard in the High Court and judgments have now been handed down.

The decision and arguments raised by the tenants

In resounding judgments in favour of the landlords, the court unflinchingly rejected all arguments raised by the tenants. The main arguments can be summarised as follows:

• The insurance argument: The tenants claimed that their landlords were obliged to maintain insurance against loss of rent arising from a notifiable disease and that the rent suspension clause in the lease, properly construed, should suspend the tenants’ obligation to pay rent in circumstances where a notifiable disease prevented the tenants from trading from the premises. The tenants therefore argued that the landlords were obliged to make a claim on their insurance policy to cover their losses (being the non-payment of rent from the tenants). However, whilst the landlords’ insurance policy did extend to material damage caused by notifiable diseases, the definition of “Insured Risk” under the leases did not include notifiable disease, and rent suspension clause was only triggered when there was “damage” to the tenants’ premises caused by an Insured Risk. The court therefore held that the rent suspension clause had not been triggered as there had been no physical damage to the property by and Insured Risk. In those circumstances, the rent continued to be payable by the tenants - and as the landlords could not be said to have suffered any ‘loss’, they were not obliged to make a claim on their insurance policy.

• The implied term argument: In order to find a way around the wording of the rent suspension clause requiring there to be damage to the property for the rent to be suspended, the tenants ran two additional arguments. Firstly, they said that the term ‘damage’ should be given a broad meaning to cover not just physical damage, but also economic damage where the property could not be accessed. Secondly, they argued that, given the unforeseen nature of events and the fact that the landlords did have sufficient insurance cover in place (paid for by the tenants), a term should be implied into the leases that no rent should be payable while premises were forced to be shut. The court rejected both arguments: for a term to be implied, it had to be fair, reasonable and either obvious or necessary for business efficacy. The court said that such a term was neither obvious nor necessary and that the lease clauses were clearly directed towards physical damage to building, not any other type of damage. The court made it clear that it was open the tenants to obtain their own business interruption insurance, and that they could not rely on the landlords’ policy in these circumstances.

• The lease frustration argument: Where parties have contracted to do something, they are bound to comply with their obligations; even if circumstances change and make compliance with such obligations more onerous than originally envisaged. Frustration is a possible way around this and has the effect of bringing a contract to an immediate end. Frustration generally applies to a supervening event that renders performance of the contract impossible. The courts have, historically, been very reluctant to find that a lease has become frustrated and the bar is set extremely high for frustration to be proved. In this case, the court held that the circumstances caused by the pandemic could not reasonably be expected to last for more than 18 months and the relevant leases all had relatively lengthy unexpired terms to run and were 1954 Act protected. In that context, the court said that the doctrine of frustration could not apply to the leases.

Where do these decisions leave tenants?

Unfortunately for tenants, and subject to any appeal, the judgments in these two cases have signified an almost certain death knell for any future tenant defences for non-payment of rents resulting from the Covid-19 pandemic. In order for a tenant to distinguish its position, its lease, and specifically the rent suspension clause, would need to be drawn much more widely. Indeed, when negotiating new leases with their landlords, many tenants are now pushing for a specific ‘pandemic clause’ which suspends or reduces the rent in the event of a future pandemic where the property is forced to shut or cannot be accessed.

In more welcome news for tenants, the government has recently announced that that the moratorium on forfeiture of commercial leases is to be extended again, this time until 25 March 2022. Similarly, reliance on statutory demands and winding up petitions will remain restricted for a further three months where the tenant’s inability to pay the rent relates to the pandemic.

In a further move the government has also announced plans for a binding arbitration scheme to resolve disputes between landlords and commercial tenants once the forfeiture moratorium expires in March 2022, although it remains unclear at present exactly how this scheme will operate. It is hoped that this will encourage landlords to open a dialogue with their tenants to try and find a solution that both parties can live with.