Commercial Property
By Ellen Bates
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Business Tenancies: whether a tenant could rely on retail closure during pandemic in arrears proceedings

Business Tenancies: whether a tenant could rely on retail closure during pandemic in arrears proceedings (Commerz Real Investmentgesellschaft MBH V TFS Stores LTD – 2021)

The High Court in England recently gave summary judgement to the landlord in Commerz Real Investmentgesellschaft mbh v TFS Stores Ltd, where the tenant attempted to defend debt claims brought by the landlord in respect of rents and service charges left unpaid during the COVID-19 lockdowns in the UK.

The tenant had a five-year lease of a unit in the Westfield Shopping Centre London which closed, like many other businesses, due to the COVID-19 lockdown in March 2020 and then during the subsequent lockdowns.

To help manage cash flow many commercial tenants have, since March 2020, withheld payment of rents, even in respect of periods where they were open and able to trade, using the COVID restrictions as their justification for refusing to pay. Landlords’ usual routes for arrears recovery have meanwhile been stymied following Government intervention through statutory moratoriums on the usual enforcement options (including Forfeiture and Statutory Demands) meaning they had no meaningful leverage to enforce the terms of their leases.

The landlord in this case successfully brought a claim for unpaid rent and service charge in the sum of £166,884.82 plus interest. The tenant tried to defend on numerous grounds, all of which failed, some of which are as follows:

  1. The landlord acted prematurely and contrary to the “Code of Practice for commercial property relationships during the COVID-19 pandemic” published by the Ministry of Housing, Communities & Local Government. It was found that in fact there was significant engagement from the landlord and in any event the “Code” was voluntary.

  2. The landlord took advantage of the “loophole” in the legislation suspending forfeiture for non-payment of rent as the said legislation did not prevent a claim for unpaid rent and service charge. The tenant thought this was grossly unfair.

  3. The tenant argued the landlord should have maintained insurance against loss of rent from a “notifiable disease”. The lease was drafted in such a way that the landlord was to insure against loss of rent from an “Insured Risk” but the definition of the same did not include notifiable diseases. The rent abatement clause in the lease suspended rents where there was “damage” to property by an “Insured Risk”. Therefore, rent continued to be payable unless there was physical damage to property by an Insured Risk.

The key point for landlords and tenants from this judgment, is that not paying rent during the COVID-19 lockdowns will not always be protected by the regulations published by the Government designed to help businesses during these extraordinary times. The judgment reinforces the importance of lease drafting and highlights how the need to monitor the impact legislation has on those who it is designed to protect.

The court concluded that the landlord had made efforts to engage with the tenant before proceedings were issued. The landlord was not making attempts to avoid pandemic measures, which in any event did not prevent a landlord bringing a claim for arrears. The court further agreed with the landlord in relation to insurance, finding that it was not obliged to insure against risks beyond those contained in the lease.

The court agreed with the landlord on the basis that rent suspension applied only to physical damage, and agreed that insurers would likely reject any claim on the basis that rent could be recovered from the tenant. No terms were implied into the lease that a forced closure would trigger the rent suspension provisions, nor that economic damage or losses were covered by such provisions. ‘Damage’ did not encompass non-physical damage.

Advice and action for landlords

The courts are seeing more claims from landlords now relating to the pandemic, and this will continue to be the case over the coming months. This case gives landlords clearer guidance on the courts’ approach to making judgments in the context of financial losses incurred by enforced closure where no express provisions are contained in leases to allow for rent suspension in these circumstances.

Courts will not imply terms to allow for rent suspension where a tenant suffers economic damage and will make a decision based on interpretation of the lease terms and the contractual relationship between landlord and tenant. Where tenants have withheld rent payments during enforced closures, landlords are supported by this decision in seeking recovery of those arrears.

This judgment will therefore come as welcome news to landlords, presenting a viable recovery tool for clawing back outstanding rent that may have accrued over the course of the last 12 months.

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