The High Court has found in favour of commercial landlords, in a claim in respect of their tenants' failure to pay rent during the COVID-19 lockdowns.
The three tenants (Cine-UK Limited, Mecca Bingo Limited and SportsDirect Limited) (together the "Tenants") had been unable to operate as normal due to the UK government's COVID-19 lockdown restrictions, which began in March 2020. As a result of the lockdowns, the Tenants did not pay their rent due to Bank of New York Mellon and AEW UK REIT Plc (the "Landlords") citing reasons including their inability to pay, as well as refusal to pay due to lack of earnings. The Landlords subsequently brought a claim for their rent.
KEY LEGAL POINTS AND DECISION
The Tenants advanced several defences, listed below, with the judge's decision on each of them:
- The Government's Code of Practice for Commercial Property Relationships during COVID-19 (first published June 2020) (the "Code") encourages landlords and tenants to negotiate and communicate if difficulties arise with rental payments arising out of COVID-19 restrictions. The Tenants argued that the Landlords were breaching the Code by pursuing the rent arrears and applying for summary judgment. This was dismissed by the Court: the Code is voluntary and "does not change the underlying legal relationship or lease contracts between landlord and tenant and any guarantor.”
- The rent cesser clauses in the leases should be construed in such a way that the "damage and destruction" included closure of their premises due to the lockdown restrictions, and should therefore exempt the Tenants from rent payment. This was rejected, as any closure would need to be as a result of actual physical "damage or destruction" and, in this particular situation there had been none.
- The Landlords had the benefit of business interruption insurance policies which included events affecting their trading (such as a pandemic). The Tenants argued that they should not be required to pay, as the Landlords would be able to claim compensation through their insurers as opposed to bringing a claim against the Tenants. However, this argument also failed, as the deemed purpose of the Landlords' insurance was to insure against any interruption to their own businesses, as opposed to covering the Tenants' businesses. The Tenants, for their part, could have taken out their own business interruption insurance policies.
- Each lockdown amounted to "temporary frustration" which should have suspended or even terminated the leases. The High Court confirmed that "there is no such thing as a ‘temporary frustration’, effectively suspending the contract for a period of time”.
The judgment thoroughly examines every defence raised by the Tenants. Summary judgment was granted to the Landlords.
A contract may be discharged by frustration where an unexpected change in circumstances arises after the contract was entered into, and the change is not the fault of either party. The change must either make it impossible to perform the contract, depriving the contract of its commercial purpose, or otherwise transform the obligation to perform the contract into a completely different obligation from that undertaken at the moment the contract was entered into. Where a contract is found to be frustrated, each party is discharged from its future obligations under the contract, and neither party may sue for breach.
In this case, the Tenants' "temporary frustration" argument was rejected: frustration does not "suspend" the contract, but rather it has the effect of discharging it and causing it to terminate. The contract cannot then be "revived" at a later date.
It should be noted that the doctrine of frustration does in principle apply to commercial leases. The judgment highlighted that although a contract may be frustrated if performance of a contractual obligation is rendered impossible for long enough, it did not apply in this situation as the closure periods were short in comparison with the remaining length of the leases (more than a year), so did not transform the obligations under the contract into completely different ones.
The High Court's decision will generally be welcomed by commercial landlords. It may well impact/clarify the relationship between commercial landlords and their tenants, having addressed important questions around the obligation to pay rent during COVID-19 lockdowns.
The judgment demonstrates the limits to the doctrine of frustration, which will be interpreted narrowly. It must be shown that there has been a "radical transformation" of a contractual obligation, for frustration to apply. Having a force majeure clause in a contract, setting out express circumstances in which the parties are discharged from performing their contract obligations, is a sensible alternative to relying on frustration. Such a clause will usually set out each party's obligations and/or liabilities in the event of unexpected events or circumstances, which are beyond the parties' control.
Co-Written by Nazaneen Ahmadi