Scoreboard: Landlords 2 -v- Tenants 0
Business Interruption (BI) and Rent Suspension covered physical damage, not economic loss as a result of lockdown enforced closure.
Cine-UK Limited (Cine) has lost its case in respect of rent payments due during the pandemic. It is a sting in the tail for commercial tenants hoping for some reprieve. The decision reinforces that damage and destruction in the context of insurance and rent suspension provisions means actual physical damage to the premises. It does not cover economic loss due to enforced closure and the inability to trade.
The tenants in Bank of New York Mellon (International) Limited and Cine - UK Limited and others were Cine, Mecca Bingo and Sports Direct. A number of other cases were stayed pending the outcome. The cases all argued similar points. Should tenants of commercial premises remain responsible for paying rents despite enforced closure during lockdown? Do lease rent suspension provisions and BI cover mean that rent ceases to be payable when the premises are closed other than for physical damage?
This decision came hot on the heels of another case in respect of The Fragrance Shop (TFS) at Westfield which, whilst not arguing all of the points, went the same way. There are rumours of an appeal in the Cine case and the parties have until 7 May 2021 to submit their application to appeal. We suspect that this is not the last we have heard of this case, but for the time being, it is 2-0 to landlords.
The main arguments
- Rent cesser (suspension): The reference to "damage" should be construed widely to include economic damage from the inability to trade due to the Covid-19 pandemic. The court dismissed this and said that "damage" should be given its ordinary meaning which means physical damage;
- Implied rent cesser: If the wide construction of damage was not applicable, there should be an implied rent cesser. The court dismissed this saying there was no obvious error in the leases and this was a commercial bargain between represented parties;
- Insurance: Landlords had an obligation to pursue insurance first. 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. This was dismissed largely as being counterintuitive since if the tenant had an obligation to pay rent the insurance would not kick in and therefore the issue of whether the tenant was obliged to pay rent had to come first;
- Temporary frustration of the contract: Lockdown was a frustrating event, and the leases should be treated as suspended (or terminated). The court dismissed this on the basis that there is no legal principle of "temporary" frustration. A contract is either frustrated or it is not. Whilst the doctrine of frustration can apply to leases, it is very rare and, the judge said, not applicable in these cases where the lockdown was relatively short compared with the length of leases;
- Supervening illegality: i.e. that the property could not be used because of the lockdowns (this was argued even though in some of the cases the properties could have been opened but the tenants chose not to open because of low footfall). This was dismissed on the basis that illegality on one part does not, of itself, remove any other obligations; and
- Reliance on the Code of Practice (Code) published on 19 June 2020 (and subsequently updated on 6 April 2021). The Code strongly encourages landlords and tenants to communicate and negotiate with tenants. We have seen in practice that collaboration on how to share the pain (monthly billing/reduced rents/rent deferment/rent holidays/lease re- gears - see rental concessions) has paid dividends.
It was argued in the case that the landlords should have been negotiating with their tenants rather than proceeding against them. If the landlords had not complied with the Code, then they should not be entitled to pursue the rent until they did comply. This was not an argument to stop payment, it was simply an argument to delay matters. The court dismissed this on that basis and the fact that the Code is not binding.
All of the arguments failed. Interestingly there was no consideration of another argument which has been circulating that there should be an implied provision that if the property could not be used for its lawful purpose and/or that the anticipated footfall at commencement was significantly reduced by unexpected and unknown at the time factors that rent should be reduced for that period.
Will the tide turn for tenants? We await the outcome of the government's Call for evidence which closes on 4 May 2021. This sets out potential steps that the government could take after 30 June 2021 when the temporary Covid-19 protection measures including the forfeiture moratorium and CRAR extension end, ranging from a phased withdrawal of current protections to legislative options targeted at those businesses most impacted by COVID-19. The hope is there will be suggestions for a collaborative response from landlords and tenants to avoid the cliff edge scenario of support being withdrawn and landlords chasing for unpaid rent.