Commercial rent arrears: practical tips for landlords, tenants and investors following the first reported decision on tenant Covid arrears

Landlords can breathe a sigh of relief following a recent High Court decision concerning rent arrears during the pandemic. The case of Commerz Real Investmentgesellschaft mbh v TFS Stores Ltd is the first reported decision on tenant rent arrears during the pandemic and has therefore attracted a lot of attention from both landlords and tenants.

In this case the tenant had a 5 year lease of a unit at Westfield Shopping Centre in London which commenced on 01 February 2019 at an initial yearly rent of £200,000 pa (excluding VAT). Due to the pandemic, the tenant was required to cease trading for several periods from 26 March 2020. Consequently, the tenant faced financial hardship and had not paid any rent since April 2020. The landlord issued proceedings on 03 December 2020 seeking rent in the sum of £166,884.82 plus interest.

The tenant sought to defend the claim on the following basis:

  1. The landlord issued proceedings prematurely contrary to the Code of Practice for commercial property relationships during the Covid-19 pandemic (“the Code”);
  2. The landlord exploited a “loophole” in the Government measures put in place to prevent forfeiture, winding up and recovery using CRAR;
  3. The landlord was required to insure against loss of rent to forced closures and/or denial of access due to notifiable disease and/or government action.

The High Court dismissed the tenant’s arguments. Chief Master Marsh held that the Code “does not affect the legal relationship between landlord and tenant” and “is not a charter for tenants declining to pay any rent”. He went on to say that "the context in which the claim is made does not entitle the [tenant] to contend that these principles are now part of an area of developing law. Equally, the [tenant] is not able to point to any conduct on the part of the [landlord] that might be regarded as oppressive and that the claim has been issued prematurely."

Additionally, the Court clarified that whilst the Government placed restrictions on some remedies available to landlords, such restrictions do not prevent a landlord bringing a claim for rents. The Court also held that the landlord’s obligation to insure against loss of rent was limited to the risks named in the lease and the landlord was “not obliged to insure against any other risks unless it chooses to do so”.

Lastly, the Court held that the rent suspension provision could not be construed to include the premises being closed due to a legal requirement and in fact, was limited to physical damage to the premises only.

It is clear from this decision that the Court will not imply terms into a lease obliging a landlord to provide insurance beyond what is provided for in the lease. That being said, before landlords consider issuing proceedings, they should check their obligations in the lease in relation to insurance and rent suspension.

Whilst this decision will be welcomed by many, for landlords, it is a gentle reminder of the importance of pre-action engagement and negotiation with their tenants. Landlords should be mindful of their conduct and give careful consideration to the Code and Civil Procedure Rules prior to issuing proceedings.

Landlords are likely to feel empowered by this decision and as such, tenants facing financial hardship should actively engage with their landlord at an early stage in an attempt to reach an agreement without the need for Court involvement. For those tenants which continue to refuse to pay rent, we expect they will reconsider their position following this decision, particularly given that the national lockdown measures are easing meaning that non-essential retail can re-open making cash flow less of an issue.

Whilst landlords will be eagerly awaiting the outcome of the Government’s consultation on the withdrawal from the moratorium which ends on 04 May 2021, we anticipate that landlords will feel able and emboldened to take steps to recover rent and any other arrears due under the lease in the meantime. As it currently stands, the protections put in place to protect commercial tenants during the pandemic are to expire on 30 June 2021 (subject to the consultation).

For more information on the article above please contact Rob Nicholson, Jessica Tallon and Warren Reid.

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