Recovering pandemic rent arrears: The High Court awards Landlord Summary Judgment
Litigation & Dispute Resolution experts Joanna Corbett-Simmons and William Rees look at the High Court’s recent decision to award Landlord Summary Judgment and what this means for Landlord Tenant relationships where rent arrears may be owed.
The coronavirus pandemic, ensuing from February 2020, caused significant disruption in the property market. The Government mandated closure of “non-essential” businesses meant many business Tenants renting premises made no, or severely reduced, profit and were unable to pay their rent pursuant to commercial leases held with their Landlords.
Due to the unique circumstances, i.e. that many Tenant companies were severely hindered in their ability to make profit and pay their rent as a result of the Government’s lockdown, the Government introduced legislation in section 82 of the Coronavirus Act 2020[1] to protect Tenants by preventing Landlords from “forfeiting” the lease and removing Tenants from their properties (“the moratorium on forfeiture”).
The consequence of the moratorium on forfeiture has been that in many instances Tenants have failed to pay rent since the onset of the pandemic and many Landlords are owed substantial sums in rent arrears. This is despite the efforts of the Government to protect the interests of Landlords during the moratorium on forfeiture. The voluntary code of practice for commercial property relationships during the pandemic stated that: “Tenants that can pay should pay”. The pressure heaped onto Landlords as a result of the discussed provisions has been described as a “Tenant centric” approach, favourable to the Tenant.
Now that the Government restrictions on trading have ceased and the economy continues to open up, the question remains as to what happens to the substantial rent arrears accrued throughout the pandemic? Are Landlords entitled to recover sums owed pursuant to the lease? Or do Tenants have a legal basis to withhold those sums?
The above questions were considered in the recent significant judgment of London Trocadero –v- Picturehouse Cinema’s Limited & others [2021].
[1] S82 (1)A right of re-entry or forfeiture, under a relevant business tenancy, for non-payment of rent may not be enforced, by action or otherwise, during the relevant period.
London Trocadero –v- Picturehouse Cinema's Limited & others [2021]
In Trocadero, the Landlord pursued the Tenant for rent arrears. The parties had a lease which permitted the Tenant to use the premises as a cinema. The Landlord had been paid no rent since June 2020 and rent and service charge arrears were £2.9million at the time of the hearing.
The Tenant advanced three defences in support of its position that no rent arrears were due to the Landlord:
- that terms should be implied into the leases to the effect that payment of rent and service charges should be suspended during any period for which the use of the premises as a cinema is illegal (“the implied term defence”);
- that there has been a partial failure of consideration, on the basis that the payments due under the leases were for the use of the premises as a cinema, with the result that no payments are due under the leases in respect of periods for which the premises could not be used as a cinema (“the failure of consideration defence”); and
- that the Tenant was entitled to a set off (“the set off”). The set off is outside the scope of this article and will not be considered.
The implied term defence failed on the basis that the high threshold tests of necessity and business efficacy (of the proposed implied term) were not made out. Judge Mr Robin Vos explained his reasoning as follows: In my view, the requirement for the Tenant to pay rent even though the premises could not be used for the intended purpose as a result of unforeseen, extraneous events does not deprive the leases of business efficacy or mean that they lack commercial or practical coherence. Clearly, without the implied terms, the risk is shouldered by the Tenant. However, there is no good commercial reason why the loss should necessarily be borne by the Landlord[1]. Here, Judge Vos rules against implying a term on the basis that the term is not required to make the lease make business sense nor is its inclusion so obvious as to meet the threshold. He also referred to the fact that the status quo position with contracts is that the parties expressed their intentions in the express drafting which is why a high threshold must be achieved to imply a term.
Regarding the failure of consideration defence, Judge Vos went on to reject this on the basis that: “The suggested failure of basis in this case therefore would both interfere with the agreed allocation of risk between the parties as well as being inconsistent with the terms of the leases[2]“.
The Landlord succeeded and obtained summary judgment against the Tenant in its claim for rent arrears.
[1] Paragraph 72 judgment: https://www.bailii.org/ew/cases/EWHC/Ch/2021/2591.html
[2] Paragraph 132 judgment
Practical Implications: a turn in the tide from the 'Tenant centric' approach?
The fact the Landlord was able to obtain its desired remedy using summary judgment is also potentially significant. Summary judgment is an interim application and a quicker method to attempt to dispose of a claim to a full trial. Success requires a Defendant having “no reasonable prospect of success”. In Trocadero, Judge Vos rejected the Tenant’s submissions that the matter was unsuitable for summary judgment and found that the Tenant’s implied term and failure of consideration arguments had no reasonable prospect of success.
The findings in Trocadero are significant in that Judge Vos’ willingness to find for the Landlord using a summary judgment application sends a strong message to Tenants that rent arrears from the coronavirus pandemic do appear to be recoverable and that innovative legal arguments to try and dispose of this liability will likely fail. That statement is of course subject to the usual caveats that each case can turn on its own facts. However, it is likely the facts of Trocadero are applicable to many Landlord Tenant relationships where rent arrears may be owed.
This article has been co-written by Joanna Corbett-Simmons and William Rees.
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