Recovery of commercial rent arrears accrued during the pandemic: good news for landlords
News | 17 June 2021
- Written by
- David Hacker, Partner
Before the coronavirus struck, the options for landlords looking to recover commercial rent arrears were extensive. Depending on the circumstances, you could use the statutory commercial rent arrears recovery procedure (CRAR), effect forfeiture by peaceable re-entry or court order, commence debt recovery proceedings, or even go down the insolvency route and issue a statutory demand followed by a winding up petition.
Now, as a result of temporary rules introduced by the Government to help tenants ride out the Covid storm, the options are more limited. However, as [Name of solicitor], commercial litigation lawyer with [Firm name] in [Location] explains, ‘All is not lost for landlords, as the High Court has recently confirmed that one route for the recovery of arrears is still very much open and, in certain circumstances, it can be accessed through a fast-track process known as summary judgment which will reduce the time to wait for your claim to be dealt with and means you can tackle the buildup of arrears swiftly.’
In two separate cases, the High Court has ruled that while the use of CRAR, forfeiture and winding up petitions is currently either restricted or prohibited under Covid rules, there is no corresponding bar on the instigation of debt recovery proceedings in respect of rent arrears.
There is also no bar on the use of the summary judgment procedure in respect of Covid-related rent claims, provided the monies you are seeking are properly owed and it is clear that:
• the tenant has no real prospect of being able to successfully defend your claim; and
• there are no compelling reasons why the matter should go to a full trial.
The court has also confirmed that while it is possible for tenants to advance defences to rent claims relating to Covid restricted periods, primarily based on arguments around the meaning and effect of insurance and rent cesser provisions and the application of legal frustration rules, the success of these defences will depend on the circumstances and individual lease terms.
Commerz Real Investmentgesellschaft mbh v TFS Stores Limited (2021)
In this case, the court was asked to make a summary judgment against a tenant who was being sued for rent arrears of over £166,000 plus interest. The tenant submitted that the case was not suitable for determination via the summary judgment procedure because there was a dispute as to whether the rent claimed was due. There was also a wider public interest in the matter going to a trial so that the impact of Covid on rent arrears claims could be fully considered.
In support of their position, the tenant maintained that:
• the proceedings against them had been issued prematurely, contrary to the Code of Practice for Commercial Property Relationships during the Covid-19 pandemic which requires landlords and tenants to work collaboratively to resolve rent payment issues;
• suing for rent via the instigation of debt proceedings was a clear attempt by the landlord to circumvent (via exploitation of a loophole) the package of measures introduced by the Government to protect tenants from this sort of aggressive rent recovery action; and
• the tenant was not in any event liable for the rent claimed because it had been incumbent on the landlord to take out insurance to cover loss of rent arising from a Covid-type scenario and which would have triggered the lease’s rent cesser provisions, thereby suspending the tenant’s payment obligations.
Rejecting the tenant’s contentions, the court confirmed that:
• compliance with the Code of Practice is voluntary, has no effect on the underlying landlord and tenant relationship and the rights and obligations that go with this, and should not be seen as a charter for tenants to avoid paying rent during the pandemic;
• while the Government has introduced measures to protect commercial tenants, these have deliberately been devised to place restrictions upon some but not all of the remedies available to landlords in respect of any arrears of rent that have accrued;
• there is no current restriction to prevent landlords issuing debt recovery proceedings for non-payment of rent and then seeking to obtain appropriate judgment;
• in this case there was no obligation on the landlord to insure against loss of rent caused by a pandemic. Even if such insurance had been obtained, the landlord would not have been obliged to make a claim on the policy before suing the tenant given that they had covenanted to pay the rent without deduction, counterclaim or set off; and
• if there had been any responsibility to obtain insurance against a Covid-type scenario, then that responsibility would have laid with the tenant who could have easily arranged to take out business interruption cover.
The court also confirmed that there was no basis on which the rent cesser provisions could be said to have been activated to suspend rent obligations while the premises remained closed, because (as is the case in most commercial leases) the rent cesser provisions here only applied where the premises could not be occupied because of the impact of physical property damage.
In view of this, it was clear that the tenant had no prospect of being able to defend the claim and there was no compelling reason why the case should proceed to a full trial, the existence of Covid alone being held as insufficient to satisfy the relevant test.
Bank of New York Mellon (International) Limited v Cine-UK Limited (2021)
In this case, the court was asked to issue summary judgment in respect of three different rent arrears claims which all raised broadly similar issues and which were therefore dealt with together for the sake of convenience. However, a notable difference between these cases and the Commerz case is that these landlords had arranged pandemic insurance.
Resisting summary judgment, the tenants submitted that:
• the defences they wished to raise were technically complex and therefore unsuitable for summary determination because they required in-depth consideration;
• rather than issuing proceedings, as encouraged by the Code of Practice, the landlords should have tried harder to agree alternative rent arrangements;
• while the rent cesser provisions were drafted to only suspend rent payment obligations in the event the tenanted premises became unusable as a result of physical destruction or damage, these provisions needed to be read in the context of the insurance that had been arranged and so construed as to also be triggered where the premises became unusable as a result of non-physical damage, and if such construction was not possible then a term should be implied into the lease in order to achieve the same result; and
• the imposition of successive lockdowns had, in any event, amounted to a legally frustrating event which had the effect of either suspending or terminating the leases and all corresponding rights and obligations, including those in respect of rent payments.
Rejecting the tenants contentions, the court confirmed that:
• there was nothing about the defences lodged that made the claims unsuitable for summary determination as the court was well-versed in addressing technical points as part of the summary judgment procedure, provided the points in issue were short;
• there was nothing in the Code of Practice that made it mandatory for landlords to negotiate with tenants in order to agree rent concessions;
• the rent cesser provisions could not be construed as being engaged where the premises became unusable as a result of non-physical damage, because the wording used in the leases was clear that physical damage was required, and neither was it appropriate for such a term to be implied. This meant that while insurance may have been in place to protect the landlord against losses incurred as a result of a pandemic, there could be no claim made on the policy to cover rent payments in any scenario other than where the premises had been rendered unusable as a result of physical harm; and
• although it was true that successive lockdowns had caused a lot of disruption, it could not be said that they amounted to a frustrating event as they had not rendered compliance with the leases illegal or impossible, nor had they radically changed the nature of the rights and obligations that had been agreed to such an extent that it was no longer fair for the tenants to be held to the original deals they had struck.
While the tenants had all experienced brief periods during which their premises could not be used, these were relatively small when considered in the context of the overall duration of the leases and the amount of time each still had left to run. Therefore, there was no justification for saying that the leases had been frustrated and could be considered at an end, and no basis for arguing that the leases should be suspended as the rules relating to frustration do not provide for temporary cessation.
Where does this leave landlords?
The decisions in both cases provide a welcome boost for landlords grappling with tenants who are refusing to pay their rent and who are using flawed Covid arguments in support of their position. The court has made it clear that nothing in the Code of Practice has the effect of restricting a landlord’s right to sue for recovery of rent if that is what is desired and also that arguments around insurance, rent cesser and frustration are only likely to have a prospect of success in cases where they are supported by the circumstances and lease terms.
Given that every case will turn on its facts, and there remains a chance that these decisions may yet be appealed, our advice to landlords is to seek legal guidance before you commit yourself to any particular course of action. The use of debt recovery proceedings may well be your best option for recouping the rent that you are owed, but things continue to be in a state of flux, so it is important that all routes are considered.
Our dispute resolution lawyers can help you to weigh up your options and identify a strategy with the best chance of recovering the money that you are owed.
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