The welcomed decision in Bank of New York Mellon (International) Limited v Cine-UK Limited and AEW UK REIT PLC v Mecca Bingo Limited and AEW UK REIT PLC v Sportdirect.com Retail Limited has settled the important question as to whether landlords can recover rent arrears on commercial properties following the pandemic.
“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.”
The landlords of commercial premises presented a case for the recovery of unpaid rent, which the tenants had failed to pay since March 2020, as they had been unable to trade during the lockdown periods. The landlords’ position was simply that the rents and interest continue to be payable notwithstanding the existence of the relevant Coronavirus Regulations and their effects.
The Court was required to consider whether Covid-19 was a reason for tenants to withhold rent payments.
The tenants raised various arguments as to why they should not be liable to pay rent in support of their position that the pandemic had rendered the leases impossible to fulfil. The main arguments considered by the Courts were as follows:
- Rent Suspension Clauses
The rent suspension clauses (which are triggered in the event of damage or destruction to premises) should kick in because “damage or destruction” should be extended to financial damage (due to an inability to trade as a result of the pandemic).
Given that landlords have actually insured against loss of rent in the event of precisely the event which had occurred (and the tenants had paid for that insurance) the landlords’ insurance should be relied upon. Furthermore if the insurance did not cover the loss, then that was the fault of the landlords.
The lockdown was a frustrating event, and the lease should be treated as suspended (or terminated), therefore the rents were not payable.
- Government guidance
Government guidance required landlords and tenants to consult as to rent suspension or similar measures. Joined with this was that the pandemic was a supervening event making performance of the leases illegal.
The Court rejected each of the tenants’ arguments.
Put simply, the rent suspension clause is only triggered in the event of physical damage or destruction to the premises and should not be extended to financial damage.
The Court made it clear that a landlord’s obligation is to insure the ‘bricks and mortar’ and it is a tenant’s obligation to insure against financial loss to the business.
The leases between the parties were not frustrated; the rent was still payable by the tenants despite the pandemic.
The pandemic was not a supervening event which temporarily suspended the tenants’ obligation to pay the rent.
Practical implications of the Judgment
The unhesitating rejection of the claims by the tenants will no doubt provide much comfort to landlords, particularly in light of the difficulties of rent collection over the course of the last year.
This Judgment shows commercial tenants’ obligation to pay rent is not overridden by the pandemic, with a conclusive decision made that ‘damage or destruction’ wording should be ‘physical damage’ and cannot be extended to mean financial damage.