We have the first reported judgment of a landlord’s claim for commercial rent arrears concerning issues raised in a tenant’s defence as a result of the COVID-19 pandemic. In the case Commerz Real Investmentgesellschaft mbh v TFS Stores Limited  EWHC 863 (Ch).
The landlord sued for non-payment of rent and service charge accruing during the period of lockdown in respect of its premises at Westfield Shopping Centre in London.
The Defendants defence was threefold:
- First that the claim was issued prematurely and contrary to the Code of Practice for Commercial Property Relationships During the COVID-19 Pandemic
- Second that the claim was a means of circumventing the measures put in place by the government to protect commercial tenants and prevent landlords from using certain remedies available to it such as forfeiture and winding-up petitions
- Thirdly that the landlord was in breach of its insuring covenant as it should have insured against loss of rent as a result of forced closures and/or denial of access due to notifiable disease and/or government action (and the rent cesser clause would be triggered as a result of damage caused by an insured risk)
The landlord brought an application for summary judgment and was successful.
The judgment explained
In respect of the first point, the court said the landlord was not in breach of the Code of Practice in issuing its claim as the code does not suspend or vary the parties’ obligations under the lease. The Code itself makes clear that it “is a voluntary code and does not change the underlying legal relationship or lease contracts between landlord and tenant and any guarantor”.
In respect of the second point, the issuing of a debt claim was not a “loophole” to circumvent the measures brought in by the government to protect tenants, as the government had not altered the ability of a landlord to bring a claim for unpaid rent and service charge.
In relation to the third point regarding insurance, the landlord was not required to ensure against a notifiable disease or government action under the terms of the lease. They were not defined as Insured Risks and the landlord was not obliged to insure against any other risks unless it chooses to do so. Further, the landlord was not obliged to insure against the tenant’s loss of business. A policy would cover any loss of business caused to the landlord however, the tenant should take out its own insurance policy to protect against its losses. Any claim by the landlord under its policy would therefore be rejected by its insurer on the grounds that the landlord had not suffered a loss to its business. There was no justification for an argument that the landlord must look first to its insurance policy where the rent remained due under the terms of the lease.
The rent cesser clause
In any event, the rent cesser clause is not triggered because there has been no physical damage to the property. The rent cesser clause only applies where there has been damage to the property caused by an insured risk.
Defendant also sought to imply a rent cesser clause where premises were incapable of being kept open contrary to a “keep open” clause in the lease. The judge helpfully commented, “The lease apportions risk between the parties and the rent cesser provisions apply exceptionally in the limited circumstances they expressly contemplate, and no further.”
Many landlords are seeing tenants raising the Code of Practice as a reason not to pay rent. This judgment makes it clear that the Code of Practice does not alter the obligations in the lease of a tenant to pay rent. The judgment deals with issues raised by tenants regarding the terms of the insurance and while a landlord must ensure for the defined Insured Risks, there is no obligation for it to insure for any other risk. Further, the comments regarding rent cesser clauses confirm that the rent cesser provisions should not apply to wider circumstances than it states on the face of it.
The case was determined at summary judgment rather than at trial and so there is scope for arguments to be developed at a full trial in other cases, but there is now some judicial commentary on how cases involving COVID-19 defences may be considered by the courts.
The moratorium on forfeitures is due to end in March 2022, and in light of this judgment, landlords may now see an increased willingness for tenants to pay their rent arrears or at least to reach an agreement on the rents.
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About the author
Iain Bould is the head of our Commercial Litigation department.
Iain has over 28 years of experience in Commercial Debt Recovery having worked in both Private Practice and Industry and brings a pragmatic and commercial approach to recovering debts. With extensive experience working across all industry sectors, Iain has particular expertise in working with Insolvency Practitioners in advising and recovering outstanding insolvent company ledgers.
If you need any advice or further information please contact Iain at firstname.lastname@example.org