Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others  EWHC 1013 (QB)
The High Court has upheld three joined claims for unpaid commercial rent. In each case, various defences were put forward based on the consequences of the COVID-19 pandemic.
The key defences included that the rent should have been suspended, that insurance applied for the tenant's benefit, that terms could be implied into the leases to negate liability and that the leases had been "temporarily frustrated". All of the defences failed and the tenants were ordered to pay up. Good news for landlords, but it remains to be seen whether the Government's planned arbitration scheme for commercial rents will alter the balance of power once again.
Debt claims were brought by landlords against three commercial tenants that had failed to pay their rent during the course of the pandemic. The tenants were all well known brands, being Cine-UK, Mecca Bingo and Sports Direct.
Each of the tenants had been impeded in its ability to trade since March 2020 as a result of the various lockdown restrictions imposed by the Government. Nevertheless, the parties had failed agree concessions to the rent and the landlord had lost patience. Once the matter reached Court, the landlords sought summary judgment of the issues on the basis that there was no credible defence to non-payment.
In view of the means of the tenants, and the substantial leasehold property portfolios they hold, it is perhaps unsurprising that several defences were raised to the claims. These covered off many defences that had been mooted by property lawyers following the onset of the pandemic.
- Rent cesser / insurance - The tenants argued that the rents in their leases should have been suspended, since the pandemic had caused "damage" within the meaning of the rent suspension clauses. This in turn would trigger the landlord's insurance. However, the Court found that the terms of the rent cesser provisions were largely standard provisions that had never before been given the meaning ascribed to them by the tenants. "Damage" in this context meant physical damage to the actual premises. The purpose of the insurance policies was to protect the landlords' interests, not those of their tenants. Even where the landlords had been able to recover for loss of rent following non-payment by the tenants, the tenants should not obtain the benefit of this since the rent had not been suspended.
- Implied terms - The tenants argued that the leases should be construed to contain implied terms to suspend the rent in truly exceptional circumstances, such as those caused by the pandemic. However, the Court held that, although exceptional, the pandemic was foreseeable. There have been pandemics previously and doubtless they will occur again. Indeed, the landlord's insurance provisions had provided for such an event, so the draftsman could equally have provided relief for the tenant's benefit. Furthermore, it was not clear what the implied term should be, as many forms of rent concession are possible and "pandemic clauses" take all sorts of different forms. As a result, the Court held that the leases had already allocated the risks associated with a pandemic and it was not necessary to imply any terms to achieve business efficacy.
- Frustration - A contract is frustrated when it is rendered impossible to perform because of an unforeseen event that radically alters the relevant circumstances. The tenants argued that the lockdown constituted such an event. The Court accepted the principle of this argument, but not the conclusion on these facts, since long periods of time remained unexpired on the leases and the tenants had been able to trade intermittently. The concept of any "temporary frustration" of the leases was also rejected, there being no basis in law for this.
- Compliance with the Code of Practice - The Government's "Code of Practice for commercial property relationships during the COVID-19 pandemic" is a voluntary code setting out the Government's expectations where the pandemic has impacted a landlord and tenant relationship. It sets out various ways that parties can compromise rental liabilities although parties are not obliged to agree to them.
In this case, the defendants argued that the landlords had failed to comply with the Code, but the Court rejected this as a defence to liability. The Code is expressly stated to be voluntary. It also confirms that tenants that can pay rent should continue to do so.
- Suitability for summary judgement - The tenants argued that these were not simple debt claims, since complex matters of law were raised by the circumstances created by the pandemic and the background to each of the three disputes was different. As such, the tenants argued that the claims must be considered following a full trial. However, the Court saw no prospect of the tenants' arguments succeeding at trial and no other compelling reason to proceed to a trial.
It is notable that each of the tenants was a household name with significant means. They ran almost every conceivable argument to avoid liability but lost on all fronts, with the Court willing to dismiss the defences on a summary basis.
Given that the forfeiture moratorium is to be extended until 25 March 2022, landlords sensing that their tenants can afford to pay will be no doubt be considering litigation. However, the Government still has the opportunity to alter the balance of power again with its proposed arbitration scheme for commercial rents. It is not yet known whether this will bring elements of the Code of Practice into force or whether the "ringfencing" of pandemic rents will provide concessions for tenants, so watch this space!