Covid-19, Legal Certainty and Commercial Leases

Photo by Luis Quintero on Pexels.com
4 May 2021

Judgment was given in the case of  Bank of New York Mellon (International) Limited v Cine UK Ltd AEW UK Rent plc v Sports Direct.com Retail Ltd: AEW UK Rent plc v Mecca Bingo Ltd on 22 April 2021. 

Background

The claimants were landlords, who had brought claims for non-payment of rent during the Covid-19 pandemic. The leases were commercial and the tenants were well known businesses running cinemas, bingos and retail businesses from the properties. The tenants had to close their businesses because of the COVID-19 pandemic. Each of the leases contained provisions for insurance and also a rent cessor clause. 

The rent cessor clauses provided that basic rent should be suspended if access to the properties had been destroyed or damaged by an insured risk, meaning that the properties were unfit for occupation.   The leases also provided that the tenants had to pay a proportion of the relevant insurance premium and each tenant had duly done so. The landlords had taken out insurance, which insured against loss of rent resulting from business interruption because of a human infectious disease.  The tenants sought to rely on this fact, amongst other reasons, to support their non-payment of rent.

Unconvinced by the tenants’ arguments, the claimant landlords issued an application for summary judgement pursuant to Part 24.2 of the CPR which provides that:

"The court may give summary judgment against a defendant...on the whole of a claim or on a particular issue if –(a) it considers that –(ii) that defendant has no real prospect of successfully defending the claim or issue... and (b) there is no other compelling reason why the case or issue should be disposed of at a trial"

The Tenants’ Submissions

The arguments submitted in the tenants’ defence of the proceedings may be summarised as follows:

  • The UK Government’s Code Practice, published in June 2020 in response to the pandemic, meant that the parties to business leases should try to negotiate arrangements to assist tenants, such as rent-free periods.
  • The rent cessor clauses in the leases meant that the rent should be suspended.  Alternatively, a rent cessor clause suspending the payment of rent ought to be implied into the leases.
  • The tenants were entitled to benefit from the rent cover under the terms of the insurance secured by the landlords.
  • The leases had been temporarily frustrated.

The tenants’ arguments were unsuccessful on all counts for the following reasons:

Code of Practice


The court held that the Code of Practice was voluntary and was therefore outside the scope of litigation.  Furthermore, the Code applied to tenants that were unable to pay their rent.  The tenant were not claiming this and, therefore, the code did not apply.

Construction of the Rent Cessor Clauses

The rent cessor clauses specifically referred to physical damage and, as there had been no physical damage to the properties, the causes did not apply.

The judge did hold that it would have been fair, reasonable and equitable to imply a rent cessor provision into the leases to account for the pandemic but, the obviousness test was not met.  The judge stated that, “the burden is on the Tenants to show either (or both of) obviousness or necessity for business efficacy”.

As the leases were “lengthy, standard form and professionally drafted documents which appear to have been prepared with care and do not contain any drafting errors” and as they already contained rent cessor clause for physical damage, the judge concluded that the lease was intended to contain all of the circumstances to which a rent cessor clause would apply, and that did not include events related to human infectious diseases.    A pandemic was not wholly unexpected as pandemics had existed in the past.   An implied clause was not required to give business efficacy.

The Landlords’ Insurance


As the rent cessor clauses did not operate, the insurer was not required to indemnify the landlords for the rent. The tenants argued that, as the landlords had chosen human infectious diseases as an insured risk, the landlords should have secured insurance cover for loss of rent too, which they had not.  The court found that it was logical for the landlord to limit the insurance to reflect the terms of the rent cessor clauses contained in the leases.   The insurance was for the landlords’ benefit and the tenants could have taken out their own business interruption insurance policy. The fact that the tenants were was paying part of the premium, was not a relevant factor because it was simply part of the overall costs for the lease. 

Frustration

The tenants submitted that the enforced closures of the properties over certain periods meant that rent was not payable for such periods because of “temporary frustration”.  The landlords argued that there was no such thing as “temporary frustration” in law and the judge agreed.  

Conclusion

The court concluded that the tenants had no reasonable prospect of success at trial and that there was no other compelling reason to dispose of the case for trial, therefore satisfying part 24 of the CPR and making a finding of summary judgment in the landlords’ favour.

It is quite clear from the judge’s concluding comments that the court felt sympathy for the tenants and the economic impact that Covid 19 had had on their businesses.  Nevertheless, it was important for the law to approach the resolution of disputes by applying settled principles and the judge here, quoting Mr Salter QC in TKC v Allianz reinforced that:  "In times of uncertainty the law must provide a solid practical and predictable foundation for the resolution of disputes and the confidence necessary for an eventual recovery… Contractual rights are to be evaluated by applying settled principles to the contract in question. Legal certainty remains paramount and gives the surest basis for resolution."

© Melissa Worth 2021

The Dispute Adviser

A legal blog by Melissa Worth
You can also follow and/or contact me on:
Copyright
2024
 © All rights reserved
Design by John Cooper
linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram