Does a tenant have to pay rent when the government orders it to close due to Covid?
Monday 19th April 2021
The recent judgment handed down in the case of Commerz Real Investmentgesellschaft mbH v TFS Stores Limited on the 16 April is the first reported court judgment on whether tenants are still obliged to pay rent under their leases during pandemic-related closure.
In this case, the tenant, a fragrance retailer, had not paid any rent since April 2020. The tenant attempted to rely on the following defences against the landlord’s claim to recover the arrears:-
- It alleged that the landlord had failed to comply with the Government Code of Practice for Commercial Property Relationships during the Covid-19 Pandemic.
- It claimed that the Landlord was exploiting a “loophole” in the Government restrictions on both forfeiture and other enforcement action (such as CRAR) placed on landlords during Covid. This argument appears to have been based on the idea that, because the Government had put in place some specific restrictions on arrears enforcement, the “intention” behind this should be applied to allow the courts to apply restrictions to other means of recovery (i.e. court action).
- It alleged there should be an implied term in the lease suspending the rent in the event of a notifiable disease, and that the landlord had an obligation to insure against loss of rent due to forced closures or denial of access.
All three defences were rejected. The judge noted that the Code of Practice was not legally binding and that, in any event, it did not appear that the landlord had failed to comply. On the “loophole” point, the Court dismissed this in short order. The judge distinguished the enforcement steps the Government had restricted (CRAR, forfeiture and some insolvency processes) and said the landlord was still perfectly entitled to bring a claim for the debt in court.
As to insurance, the rent would only cease under the tenant’s lease where there was physical damage to the store. There was no justification for an argument that the landlord must look first to its insurance policy where rent remains due under the lease. The suggestion that a term should be implied to make the insurance and rent suspension provisions in the lease wider, so as to capture the pandemic, was robustly rejected – the Court noted that implying a term of this nature would require the term to be “so obvious it did not need to be said”.
The Court appears to have had little difficulty reaching this decision. It was made in the landlord’s summary judgment application, in which the tenant was unable to even persuade the Court that it had any real prospect of defending the claim, or that there was any compelling reason for the case to go to a full trial.
How will this affect commercial landlords and tenants experiencing rent arrears?
Tenants’ circumstances and defences may differ, and the wording of landlords’ insurance policies will vary; claims will be looked at on a case by case basis. However, the judgment in this case is likely to be influential.
It is worth noting that the defence in this case did not include the following arguments which the tenant might have considered pursuing:
- temporary suspension/frustration of the lease; and
- an implied term that rent is only payable when premises fully available for intended use (although the judge’s comments on implying a term into the insurance covenant really damage the credibility of such an argument).
These further arguments may still be arguable by tenants as a defence to accumulated rent arrears over the course of pandemic closures, so the outlook for other rent arrears claims is not an entirely foregone conclusion. However, this judgment clearly shifts the momentum in favour of landlords and it may have weakened the position of tenants in negotiating concessions and payment plans.
For further advice on this, please contact one of our property disputes law experts below.