Even before the first lockdown was formally announced landlords and tenants were quick to ask: are tenants still required to pay rent on properties that they are unable to use due to a lockdown? Although all cases will turn on the drafting of a particular lease the prevailing view was that the obligation to pay rent was unaffected by a period of enforced closure resulting from a lockdown. This has now been confirmed in the case of Bank of New York Mellon (International) Limited v Cine–UK Limited and others.
As a result we have seen the emergence of pandemic rent suspension clauses in new and renewal leases that have been negotiated since the first lockdown was announced. The inclusion of such a clause in leases renewed pursuant to the Landlord and Tenant Act 1954 has recently been examined in the case of WH Smith Retail Holdings Limited v Commerz Real Investmentgesellschaft MBH.
Bank of New York Mellon v Cine-UK
The tenants in this case were Cine, Mecca Bingo and Sports Direct. The tenants argued that rent should not be payable under their leases during periods of enforced closure. The tenants raised the following arguments (amongst others) all of which were dismissed by the court:
Rent Suspension – most leases contain clauses suspending payment of the rent where there has been damage by an insured (and sometimes an uninsured) risk to the property. The tenants argued that the reference to damage should be construed so as to included economic damage. This court decided that damage should be limited to its ordinary meaning – i.e. physical damage. As a result the lockdown had not caused damage to the property so the rent suspension clause was not triggered.
Implied Rent Suspension – in the absence of a specific rent suspension in the lease the tenants argued that the court should imply a rent suspension clause into a lease on the basis that the parties would never have intended rent to be payable for a property that cannot be used. This argument could be the subject of an article in its own right but, in summary, the court held that such a clause was not so obvious that it did not need to be set out expressly within a lease. The leases in question were detailed documents negotiated between represented parties and if the tenants wanted the rent suspension clauses to extend to cover periods of enforced closure then it should have been negotiated at the time.
Landlord’s insurance – where the landlord had insured against loss of rent in the event of a notifiable disease the tenants should be entitled to withhold rent payments. This was dismissed as the insurance was in place to cover losses suffered by the landlord. If the tenants had an obligation to pay the rent then the landlord has suffered no loss so the insurance would not pay out.
The Code of Practice – The Government’s Code of Practice encourages parties to communicate and negotiate during periods of lockdown. The tenants argued that landlords should not pursue court proceedings until they have complied with the Code. This was dismissed due to the non-binding nature of the Code.
Other arguments were put forward by the tenants but the above are the key issues that we have seen parties raise over the past year. The case comes quickly after the decision in Commerz Real Investmentgesellschaft MBH v TFS Stores Limited which also found in the landlord’s favour. It provides useful confirmation that the express terms of the lease will be pivotal in determining whether rent remains payable during enforced periods of closure. We will wait to see whether the tenants appeal.
WH Smith Retail Holdings Limited v Commerz Real Investmentgesellschaft MBH
This case is of particular interest as it examines the approach that the court will take to non-contested lease renewals post the start of the pandemic. We have seen the inclusion of new drafting in leases in the past 12 months and the market will take some time to settle before we can say with certainty what has become “market standard”.
WH Smith’s unit was located in Westfield London. During the recent lockdown the unit in question had remained open as it contained a post office (classed as essential) but most other units in the shopping centre were closed. Sales at the unit were down by over 90%. Terms for a lease renewal were largely agreed save for rent and the detailed wording of a pandemic rent suspension clause. The court was asked to determine these terms.
The inclusion of a pandemic rent suspension clause was agreed in principle but the parties did not agree on the relevant trigger to make the clause bite. Westfield argued that the clause should only apply where the unit was forced to close entirely. WH Smith’s position was that the clause should apply where other non-essential retailers within the shopping centre are required to close.
The court sided with WH Smith. The landlord’s proposal would mean that it was highly unlikely that the clause would ever be triggered in practice as post offices have been entitled to remain open throughout all lockdowns to date.
Westfield also argued that there should be a 10% rent uplift to reflect the inclusion of the pandemic rent suspension clause. The court disagreed. It held that the pandemic rent suspension clause was aimed at sharing the burden of the loss caused by a lockdown and is now expected by tenants and has therefore been priced into the market. The inclusion of the clause did not lead to an uplift in rent.
The case is a useful reminder of the need to draft pandemic rent suspension clauses carefully – the parties will need to consider the relevant trigger for the clause to have effect and the allocation of risk between the parties. It is also interesting that the court was of the view that such clauses are priced into the market. This suggests that a court will order the inclusion of a pandemic rent suspension clause within a lease without an uplift in rent if it is asked to determine the terms of a lease. This may be a useful bargaining chip for a tenant but we suspect that the particular location of the property and the sector in which it operates will be important in determining what reflects the market position.
Conclusion
The decision in Bank of New York Mellon v Cine-UK will not come as a surprise and it at least gives the market more certainty as to the enforceability of lease covenants during a lockdown. It will be welcomed by landlords but a collaborative relationship between landlord and tenants will still be key as we emerge from the latest lockdown. This will help to ensure that tenants are able to pay the rent that has fallen due, enabling landlords to meet their own financial obligations.