In the wake of the Covid-19 pandemic, the government introduced various temporary measures to protect commercial tenants, including:
- Prohibiting enforcement of the right of re-entry or forfeiture of business tenancies on the grounds of non-payment of rent.
- Restricting the use of commercial rent arrears recovery by increasing the minimum net unpaid rent that must be outstanding before it can be used.
- Restricting the circumstances in which winding-up petitions can be presented against companies.
Commerz Real Investmentgesellschaft mbH v TFS Stores Limited  EWHC 863 (Ch)
This recent case provides a precedent for landlords to reclaim rent on commercial premises that have fallen into arrears during the Covid-19 pandemic.
Facts of the case
Since the Covid-19 pandemic arose the UK in spring 2020, businesses including retailers, restaurants and offices have been subject to long periods in various states of closure. The government has introduced a number of measures to help such businesses, including a moratorium on forfeiture of commercial leases for non-payment of rent under the Coronavirus Act 2020 and a provision that no order for possession would be allowed in any existing proceedings started before 26 March 2020. The Corporate Governance and Insolvency Act 2020 also imposed a temporary cessation on winding up petitions and statutory demands where a company is in debt due to Covid-19.
In the case of Commerz v TFS the Tenant (trading as The Fragrance Shop at Westfield shopping centre, London) had been in rent arrears since April 2020 and had outstanding service charge payments. In December 2020, the Landlord successfully applied for summary judgment for the unpaid rent and service charge plus contractual interest.
The Tenant’s case relied on three key arguments:
- That the Landlord’s claim for payment was issued prematurely and breached the Code of Practice for Commercial Property Relationships(the “Code”), which aims to assist discussions between landlords and tenants in relation to rent during the Covid-19 pandemic.
- That the Landlord was taking advantage of a loophole in the government’s measures to assist commercial tenants by restricting powers of recovery against a tenant.
- That the Landlord should have insured against a loss of rent in the event of forced closure, notifiable disease or government action. As such, the Landlord should have claimed against their insurance policy before starting proceedings against the Tenant. The Tenant further claimed that the lease should have terms implied to this effect as well as an implied term that the rent cesser provisions apply to Covid-19.
The High Court disposed of the case at summary judgment on the grounds that the Tenant had no real prospect of defending the claim at trial and that there was no compelling reason why the case should go to trial.
The Code of Practice
Master Marsh pointed to the fact that the Code is neither law nor mandatory for landlords to sign up to, thus cannot be a legal basis for defending a non-payment of rent claim. Further, the Code clearly states that it does not change the legal relationship between the parties and that it does not override the Tenant’s obligation to pay rent under the terms of its lease.
The Tenant’s submission that the Landlord failed to engage in discussions with the Tenant about the rent arrears was similarly dismissed by the court. The Master commented that if anything the Tenant had failed to engage.
The loophole in the government’s measures
Master Marsh did not agree with the Tenant’s argument that there was a loophole in the Landlord’s ability to pursue a claim for unpaid rent or service charge. While the government has restricted some of the remedies available to landlords, landlords can still pursue other courses of action. This includes bringing a claim against a tenant for rent arrears liability.
Under the terms of the lease, the Landlord was not obliged to insure against the risk of a notifiable disease or government action. The Master noted that it is not for the Landlord to insure the Tenant’s business losses and that even if the Landlord had such a policy, it could still make a claim against the Tenant rather than the insurance policy.
The lease also contained no provision as to rent cessation or suspension in the event of the premises closing due to legal requirement. On this basis, the Landlord contended that it had suffered no actual loss to its own business and therefore would not be able to claim under its insurance policy. The fact that the Tenant had suffered loss to its business is not a sufficient claim.
The court considered the Tenant’s defence that certain terms should be implied into the lease. In order to imply terms into a contract, the BP Refinery case summarised that such term must be reasonable and equitable, necessary to give business efficacy to the lease and/or so obvious that ‘it goes without saying’. The Master did not deem this test to be satisfied here and therefore declined to imply any terms into the lease to override the Tenant’s obligation to pay rent. The judgment also serves as a reminder that landlords and tenants alike should carefully read the terms of their leases.
This case marks a welcome development to landlords concerned about payment of rent arrears during the Covid-19 pandemic. Whether or not they have signed up to the Code, landlords would however be wise to enter discussions with tenants over payment of rent during Covid-19 prior to issuing proceedings.
The government announced on 16 June 2021 that it will introduce legislation to ringfence rent arrears accrued due to Covid-19 for business tenancies. It will be for landlords and tenants to come to an arrangement to deal with any such debts, but if this is not possible the government is proposing that a binding arbitration process will apply to ensure a reasonable position is reached.
The moratorium on forfeiture for non-payment of rent in commercial leases was due to end on 30 June 2021, but the government has recently announced an extension until 25 March 2022, which will be two years since the measure was first put in place. The restrictions on winding up petitions and service of statutory demands will also remain for a further three months to 30 September 2021.
Now that many businesses are re-opening, there may be some landlords who will be disappointed by the further extension. However, tenants are likely to welcome the move, particularly in light of the fact that despite the delay to the easing of lockdown measures there appears to be no extension planned to the current furlough and business rate relief schemes.
For further information on this topic or on any other legal area, please contact John Szepietowski or Kay Stewart at Audley Chaucer Solicitors on 01372 303444 or email firstname.lastname@example.org or visit our Linkedin page.
This information was correct as at September 2021