High Court grants summary judgement to a landlord for non-payment of commercial rent and service charge by a tenant.
In the recent case of Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd  EWHC 863 (Ch) the High Court, Business & Property Courts considered whether a landlord was entitled to sue a tenant for non-payment of rent and service charge where the arrears accrued whilst trading was restricted during the Government’s imposed Covid-19 restrictions.
During the Covid-19 pandemic the Government introduced various temporary measures to protect commercial tenants. Those measures include:
- Preventing the landlord from enforcing a right of re-entry, or forfeiting a business tenancy due to non-payment of rent.
- Restricting the use of commercial rent arrears recovery (CRAR) by increasing the sum that must be outstanding before it can be used.
- Restricting the circumstances in which winding-up petitions can be presented against companies.
However, those protections do not affect the landlord’s right to pursue other action for non-payment of rent, including:
- Claims for debt, occupation rent or damages;
- Claims against a Tenant’s rent deposit; and
- Claiming against guarantors.
In addition, the Government has also published a Code of Practice for Commercial Property Relationships during the Covid-19 Pandemic (“the Code”) to assist discussions between business tenants and landlords relating to rental payments during the COVID-19 pandemic.
The Claimant Landlord was the leasehold owner of a shopping centre in London. The Defendant Tenant had a 5-year lease of a unit in the shopping centre. Due to lockdown restrictions the Tenant had been required to close its shop for significant periods.
The Tenant failed to pay any rent from April 2020 and failed to pay the monthly service charge for April, May, and June 2020.
The lease contained various covenants, including:
- A covenant that the Tenant shall keep its shop open and actively trade, unless prevented from doing so due to damage by an insured risk, or because doing so would be unlawful.
- An obligation on the Landlord to insure against insured risks “or such risks as the Landlord may consider prudent to insure”.
- A provision that the rent would be suspended if the premises were damaged by an insured risk.
As a result of the Tenant’s failure to pay rent and service charge amounting to over £160,000 the Landlord commenced court proceedings. As part of those proceedings the Landlord applied for summary (early) judgment on the basis that the Tenant had no real prospects of successfully defending the claim, and there was no compelling reason why the claim should proceed to trial.
In response to the Landlord’s claim the Tenant sought to argue that:
- The Code required landlords and tenants to work together. The Tenant had been reliable, but the pandemic had created exceptional circumstances. As such, the Landlord’s claim was started prematurely.
- The Landlord’s claim was an attempt to circumvent measures put in place by the Government for preventing forfeiture, winding up and recovery using CRAR.
- The insurance obligation required the Landlord to insure against loss of rent resulting from forced closures or preventing of access due to a notifiable disease or Government action. Therefore, the Landlord must claim under the loss of rent insurance policy before commencing proceedings against the Tenant.
- The rent suspension provision, when properly considered, applied to the Covid-19 pandemic as the pandemic was a suspending event.
The High Court granted summary judgment for the Landlord. In his judgment Chief Master Marsh addressed the matters raised by the Tenant.
Firstly, whilst the Code encouraged landlords and tenants to take a balanced view, it was not a charter for tenants to avoid paying rent. The High Court dismissed the Tenant’s claim that the claim should go to trial because the Landlord had failed to engage with the Code. The Court determined that there had been significant engagement by the Landlord and, if there was a lack of engagement, it was by the Tenant.
Secondly, whilst there were restrictions on some of the remedies available to a Landlord, issuing a claim and seeking judgment had not been restricted.
As to the Tenant’s argument in relation to insurance, the Court held that the lease made it clear that the Landlord was only required to insure against specific, named risks; there was no obligation to insure against notifiable diseases or Government direction.
But, even if the lease did contain such an obligation, it was not reasonable to expect the Landlord to insure against the Tenant’s losses.
In relation to the rent suspension provision, the Court determined that the provision only applied where there was physical damage to the premises; rent was suspended whilst the premises were reinstated. The Judge stated that there was no basis for alleging that the provision also applied in the event of the premises being closed due to a legal requirement.
It will no doubt come as a relief to commercial landlords that the Court has confirmed that they are still entitled to sue a tenant for rent arrears accrued during the pandemic.
The decision is also helpful in that it confirms that the Code does not affect the legal relationship between a landlord and tenant.
Landlords and tenants have separate insurable interests, and the Tenant’s argument that it was reasonable for the Landlord to insure against the Tenant’s losses failed. Tenants should arrange their own business interruption insurance if they wish to be covered for this type of loss.