Non-payment of rent during the COVID-19 lockdown

Bank of New York Mellon (International) Ltd v Cine-UK Ltd

A recent decision of the High Court in England will be of interest to landlords and tenants of commercial premises which have been subject to closure during the COVID-19 lockdown.

Background

The case concerned applications for summary judgment, brought by landlords, in respect of unpaid rent and VAT that had fallen due during the COVID-19 lockdown.

The defendants in the case were well-known commercial entities:

• Cine-UK;
• Mecca Bingo; and
• SportDirect.com Retail.

Each of the defendants had been unable to trade, to a greater or lesser extent, during the COVID-19 lockdown.

The defendants’ case was that they had a real prospect of defending the landlords’ claims, and advanced the following arguments (amongst others):

1. Rent Cesser clauses in the leases ought to be construed, in light of the COVID-19 lockdown and the landlords having relevant insurance cover, so that the rent ceased to be payable at least while the premises were required to be closed.
2. Alternatively, terms to that effect should be implied into the leases.
3. As the landlords had insurance cover, the premiums for which had been paid by the defendants, the defendants should not be required to pay the relevant rent. In other words, the landlords’ remedy for any unpaid rent was against their insurers.
4. The COVID-19 lockdown frustrated the leases, which should be treated as suspended.

The Law - Summary Judgment

Summary judgment is a process by which judgment can be obtained without the need for a full trial, saving time and costs. A plaintiff can apply for summary judgment on the ground that the defendant has no defence to all or part of a claim.

The Law - Rent Cesser

A rent cesser clause in a lease ordinarily provides that when a property sustains physical damage and a tenant cannot therefore occupy and use (or access) their premises, the rent that would otherwise be due under the lease is not payable.

The Law - Frustration

Frustration is the legal mechanism by which a contract can be set aside due to an unexpected event that occurs after a contract is entered into that either:

• Renders the fulfilment of contractual obligations impossible; or
• Radically changes a party's obligation to perform under a contract.

Decision

The landlords were successful in their application for summary judgment in their claims for rent, VAT and interest.

In reaching that conclusion, the Master noted that:

• In his view, COVID-19 and the subsequent lockdown were not “truly unforeseeable”, although they could well be said to be “unprecedented”. The previous Asian SARS epidemic appeared to have weighed on the Master’s mind in forming that view.
• The Rent Cesser clauses in the leases represented an agreed allocation of risk that was “perfectly commercial and reasonable”, particularly in circumstances in which each of the defendants could have insured their own businesses and turnover under a business interruption policy. They were focussed on physical damage to “bricks and mortar” as opposed to “effects on trade”, and were not engaged by the circumstances of the COVID-19 lockdown.
• The landlords, who had the benefit of insurance, did not suffer a loss in the absence of the operation of the Rent Cesser provisions. There was therefore nothing for them to be insured against.
• There was no “real prospect of it being shown that any of the Leases have been frustrated.”

Carson McDowell View

The judgment will be of some comfort to landlords of commercial premises, whose tenants have been forced to close as a result of the COVID-19 lockdown. Tenants in that position may well read the judgment with some dismay.

However, the terms of each lease will need to be considered on its own merits. Whilst the leases in this case provided for a certain “allocation of risk”, what was agreed for other premises may differ. When considering tactics to recover unpaid rent, prudent landlords should also take into account their tenants’ ability to pay.

Although the judgment was given by an English Court, it may be persuasive to a Court in Northern Ireland tasked with determining the same issue.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.