Covid-19 Rent Arrears: A Lesson in Engagement
A key problem for many businesses since the start of the pandemic was – and still is – how they are going to be able to pay their commercial rents. The government’s financial help for businesses eased the pain; and though the moratorium on forfeiture of commercial leases and similar measures was welcome – it simply postponed a problem.
It was always going to be inevitable that commercial rent disputes would eventually reach the courts. A recent High Court ruling1 - in fact, the first reported judgment on the issue - has given an insight as to how the courts will approach the issues. In this case, the landlord won a claim for unpaid rent.
The background
The landlord owns the Westfield Shopping Centre in Shepherd’s Bush. The Fragrance Store (TFS) rents a unit at the centre and, as was legally required under the coronavirus emergency legislation, it closed its store in March 2020. It reopened in June but had to close for the duration of subsequent lockdowns.
TFS had paid no rent since April 2020. In addition to those arrears, there was also outstanding three months’ worth of service charges. The landlord sought summary judgment for almost £167,000 in unpaid arrears and interest at the contractual rate.
However, TFS resisted the claim arguing a number of issues (though notably, not relying on any new principles of law). For example, TFS said:
· The claim was issued premature contrary to the Code of Practice for commercial property relationships during the pandemic - a voluntary code encouraging the parties to work together and take a balanced view of the issues.
· The claim was a means of circumventing government measures put in place to prevent forfeiture winding-up and recovery using commercial rent arrears recovery (CRAR); ie the landlord was exploiting a loophole.
· The landlord was in breach of an obligation to insure under the lease terms. It was reasonable to expect it to insure against loss of rent due resulting from forced closures, denial of access due to notifiable disease and/or government action.
None of TFS’s arguments succeeded. First, landlords were never prevented, during the pandemic, to issue proceedings for rent arrears.
Second, the code of practice on which TFS relied is voluntary and in no way impacts the legal relationship between the parties.
Third, the lease was clear as to the insurance obligations: the obligation to insure was limited to the risks named in the definition. The named risks did not include notifiable diseases or government directions.
What does this mean?
Businesses resisting claims for rent arrears need to ensure their defence is grounded in the law. It seems, from this case, that TFS defended the claim on weak grounds – an expensive risk to take.
It is also important, particularly in these novel pandemic-related situations, that both parties work together to resolve issues before issuing proceedings. TFS failed on this score: the claimant landlord had engaged with TFS to try to come up with an arrangement to clear the rent arrears but there was no such engagement on the part of TFS. In fact, the landlord had actively tried to avoid proceedings.
This is unlikely to be the first such case to reach the court. Each will be decided on the facts of the case but any business in a dispute around rent arrears during the pandemic should be prepared to engage with the other side and try to resolve matters outside of the court room.
1Commerz v TFS Stores [2021] EWHC 863
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you