How do you claim commercial rent involving COVID-19 issues? Anna Duffy, Head of Property outlines recent cases.
Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others 2021
This is the second reported judgment on a commercial rent claim involving COVID-19 issues in days of the judgment of Chief Master Marsh in Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd. Anna Duffy outlines this summary judgment of Master Dagnall.
This case, too, involved claims for rent stemming from March 2020, which were opposed on a number of different grounds, all of which were rejected by the Court as having no reasonable prospects of success.
The factual background to the claims were similar: the tenants (Cine-UK Ltd, Mecca Bingo Ltd, SportsDirect Ltd, and Deltic, a nightclub operator, which settled the claim by agreeing to pay in full during the course of the hearing) had been unable to trade, to various degrees, during the lockdown periods ordered by the Government. Moreover, it transpired that their landlords had been able to procure pandemic insurance, which included loss of rent, irrespective of damage to their buildings. Master Dagnall arranged for a number of them to be heard together and although the tenants were separately legally represented and put forward different arguments for resisting liability, they did ultimately rely on each others’ grounds.
The grounds were as follows:
First, it was said that summary judgment was an unsuitable procedure for claims involving technical defences of some complexity, particularly given that the court might be assisted by an appreciation of the commercial background to the leases before it.
Secondly, reliance was placed upon the Code of Practice published on 19 June 2020 and subsequently updated on 6 April 2021, with regard to commercial premises and leases, which had strongly encouraged landlords and tenants to communicate and negotiate ameliorative measures for tenants, including rent-free periods and moratoria. It was said that the claimants should have been negotiating with their tenants rather than proceeding against them.
Thirdly, it was said that the rent cesser clauses in the leases should be given a construction which engaged their provisions during the lockdown attributable to the Covid-19 pandemic, thus interpreting the operative words “damage or destruction” to include inability to trade.
Fourthly and alternatively, terms to the same effect should be implied.
Fifthly, given that the landlords had actually insured against loss of rent in the event of precisely the event which had occurred, and that the tenants paid for that insurance, they should be entitled not to pay the relevant rent.
Lastly, the lockdown was a frustrating event, and the Leases should be treated as suspended (or terminated).
The arguments which principally occupied the Court’s attention were those relating to implied terms, insurance, and frustration. The Court examined the terms of the relevant leases in great detail, noting that they contained largely standard-form terms which had never been construed in the way contended for on behalf of the tenants.
The Court considered the following factors:
(a) that the pandemic and lockdown, although unprecedented, could hardly be said to be unforeseeable (noting for example the SARS epidemic two decades previously);
(b) that it was not therefore surprising that landlords had prudently insured against such matters (illustrated both by these cases, and by the FCA v Arch litigation [2021] SC 1); and
(c) that it had been open to tenants similarly to take out business interruption insurance.
These observations disposed of any arguments based upon interpretation or the need for an implied term.
As to the insurance-based arguments, which attracted the same observations, the Court commented that the landlords’ concern is to insure its “bricks and mortar”, leaving it to the tenants to insure what they consider to be important. Although the landlords’ policy did include insurance against loss of rent in the current circumstances, whether or not there was any physical damage to the premises, there was no sense in which the rent had been “lost”. That was because the rent cesser clauses themselves required damage or destruction to the premises if they were to operate, and there had been no such damage.
As to frustration, the Court considered that there was no respectable support for the proposition that a lease could be suspended temporarily under the doctrine of frustration. Only Deltic, in the case that had been settled, had argued for wholesale lease termination. The Court held that the cases before him were governed by the principles and outcome in National Carriers v Panalpina 1981 AC 675. While he was prepared to accept that the pandemic and the lockdown regulations brought in to deal with it were properly termed “unprecedented”, and would, or at least could, qualify as a supervening event, he could not see the reasonably expected period of closures as ever having been any greater than 18 months. Each of the leases before him had at least a year left to run from that point, with 1954 Act protection. Accordingly, the practical effects of the closures were in reality not much different from those in Panalpina in terms of enforced closures, while the Panalpina closure was more continuous, making it a stronger case.
For tenant and landlord advice and guidance on implied terms, insurance and frustration in contracts please contact Anna Duffy on 0151 230 1219.
