Recover rent and service charge under a commercial lease in COVID-19
An encouraging judgement for Landlords has been handed down by the courts in the recent case of Commerz Real Investmentgesellschaft mbH v TFS Stores Limited which centred on the Landlord’s ability pursue claims against a Tenant for rent arrears due to the COVID-19 restrictions. This case is the first High Court ruling on a non-payment issue where COVID-19 has been argued as the grounds for the defence.
In March 2020, the government introduced a number of measures to protect the UK economy and the public which included the closure of all non-essential retail businesses. They also announced that commercial landlords were unable to forfeit commercial leases and evict their tenants for non-payment of rent.
TFS Stores Limited (“the Tenant” who is trading as the Fragrance Shop) occupied a premises in Westfield Shopping Centre in London. The COVID-19 restrictions implemented in March 2020 led to forced store closure. The Tenant had not paid their rent since April 2020 and there were also a number of outstanding service charge debts which had accrued.
In December 2020, the Landlord successfully applied for summary judgement against the Tenant for the unpaid rent and service charges.
The Tenant relied on three grounds to their defence:
- Firstly, the Tenant claimed that the Landlord’s claim for the payment of the arrears was issued prematurely and therefore in breach of the Code of Practice for Commercial Property Relationships during the COVID-19 Pandemic (“the Code of Practice”) which was put in place to assist discussions between landlords and tenants over rental payments.
- Secondly, the Landlord was taking advantage of a loophole in the Government’s restrictions on the recovery of rent arrears and the COVID-19 measures had been put in place to restrict the Landlord’s ability to pursue a claim for rent arrears had been restricted
- Thirdly, the Tenant argued that the loss of rent should have been covered by the Landlord’s insurance policy and the provisions of the lease placed an obligation on the Landlord to insure against the loss of rent resulting from a notifiable disease and/or government action and must claim under the loss of rent insurance policy before commencing proceedings to recover unpaid rent.
These defences were unsuccessful on the basis that the Tenant had no real prospect of defending the claim at trial.
In relation to each of the Tenant’s grounds of defence, the Court held the following:
- The Code of Practice is voluntary and does not override UK law. It therefore cannot provide grounds of defence for the non-payment of rent. In addition, the Code of Practice does not change the legal relationship of the landlord and tenant. The ruling on this point is particularly interesting as the Code of Practice has been cited by many tenants as grounds for non-payment of rent. This judgement makes it clear that the Code of Practice will not change the obligation on the tenant to pay rent under the terms of the lease.
- The Court held that there was no loophole. The government did place restrictions on some of the remedies available to a Landlord, but there is no legal restriction on the Landlord’s ability to pursue a claim for unpaid rent or service charge against the Tenant.
- The terms of the lease only stipulated that there was an obligation on the Landlord to insure against the risks included in the definition – they did not include a notifiable disease or government action. Even if there was such an obligation on the landlord, this did not mean there was an obligation on the landlord to insure against any business interruption losses suffered by the Tenant. The Court held that there was no reason for the Landlord to turn to an insurance policy for unpaid rent as opposed to imposing liability on the Tenant for unpaid rent.
- The rent cesser terms in the lease only applied to the limited circumstances stipulated in the lease which was in the event of physical damage to the premises. There was no basis for the provisions to apply to a situation where the premises were closed due to a legal requirement.
This is a positive decision for landlords who will be eager to recover outstanding arrears from their tenants, particularly in light of the government’s restrictions easing. We look forward to seeing how further defences play out in future cases concerning the non-payment of rent due to COVID-19 and also to see whether this judgement is suggestive of the court’s attitude to Landlords in relation to these types of claims.
If you would like to discuss anything raised in this article further, please contact our Commercial Property department using the contact form below.
This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.
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We are solicitors in Camberley, Wokingham and London. In 2019, Herrington Carmichael won ‘Property Law Firm of the Year’ at the Thames Valley Business Magazines Property Awards, ‘Best Medium Sized Business’ at the Surrey Heath Business Awards and we were named IR Global’s ‘Member of the Year’. We are ranked as a Leading Firm 2020 by Legal 500 and Alistair McArthur is ranked in Chambers 2020.