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COVID-19 defences fail at hearing for commercial rent arrears

Landlords in England and Wales are welcoming the news that the first reported judgment to deal with commercial rent liabilities and COVID-related defences has now been delivered.

In Commerz Real Investmentgesellschaft mbh v TFS Stores Limited [2021] EWHC 863 (CH) the landlord was the owner of the Westfield Shopping Centre in London and leased a unit to the tenant operating as ‘The Fragrance Shop.’ The landlord sued the tenant for non-payment of rent and service charge which had accrued since March 2020.  The unit had been unable to trade as a result of the COVID-19 pandemic and national lockdown.

The tenant’s defence was made up of three main arguments:

  1. Contrary to the Code

The tenant alleged the landlord’s claim was ‘issued prematurely contrary to the Code of Practice for Commercial Property Relationships During the COVID-19 Pandemic’;

  1. Bypassing other restrictions

It was also argued that the claim was a means of ‘circumventing measures put in place by the government to prevent forfeiture, winding up and recovery using CRAR by landlords’; and

  1. Landlord’s duty to insure?

The tenant asserted that the landlord was in breach of its obligation under the lease to insure. ‘The Fragrance Shop’ said it was reasonable to expect that the landlord would have insured against loss of rent due to forced closures as a result of notifiable diseases/government action.

Chief Master Marsh was satisfied that the landlord had successfully discharged the burden of establishing that the rents were due.  He believed the tenant had a weak defence and therefore ruled that there was no compelling reason not to grant summary judgment.

In relation to the first point of defence, Chief Master Marsh noted that the landlord was not in breach of the Code of Practice.  He said it was clear from the first paragraph of the Code that it does not affect the legal relationship between the landlord and tenant. The Code states that ‘it is intended to reinforce and promote good practice amongst landlord and tenant relationships as they deal with income shocks caused by the pandemic’. However, it is a voluntary code and ‘does not change the underlying legal relationship or lease contracts between landlord and tenant and any guarantor.’

On point two, Chief Master Marshall observed that the government had placed restrictions on some, but not all remedies that are open to landlords during the pandemic.  He added that there is no legal restriction placed upon a landlord bringing a claim for rent and seeking judgment in the usual way.

In response to the tenant’s final argument, the Judge confirmed that the Landlord was not required (pursuant to the terms of the lease) to insure for loss of rent due to a notifiable disease/government action. This was not defined as an ‘Insured Risk’ and it was therefore at the landlord’s own discretion.   Furthermore, he believed that the loss of business suffered as a result of the pandemic was for the tenant to insure against and recover. 

This news will undoubtedly be well received by landlords whose commercial tenants have been withholding the payment of rent during lockdown. The judgment emphasises that the Code of Practice does not alter the tenant’s obligations to pay rent under their lease.  With the moratorium on forfeiture due to end on 30 June 2021 and the judicial commentary in this case, landlords may now see an increased willingness of tenants to reach agreement, especially now that trading has recommenced.

Editorial prepared by: Maeve Fisher, Partner, Mills Selig

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