Property Litigation weekly update - 23 April 2021
This week we have more of a tasting menu than our usual Menu Formule. To start there is commentary on two recent Covid rent arrears cases, with the updated Code of Practice for commercial property lettings following as a palate cleanser. By way of entrée we report on a meaty tribunal decision in which a periodic tenancy was found to have been granted. This comes garnished with other insights and positive news for dessert. Bon appetit!!
Paying the Bill
Landlords' remedies have been restricted by Covid measures, but whilst ruling out forfeiture, CRAR and insolvency measures, this has not prevented debt proceedings for unpaid rent. Two judgements handed down in the last week have seen the High Court come down hard on tenants attemting to "eat and run". The first, Commerz Real Investmentgesellschaft mbh v TFS Stores Limited came out of a rent claim at the Westfield Shopping Centre against the entity trading as The Fragrance Shop. The landlord sought summary judgement on its claim, with the tenant raising three grounds of defence, all of which failed, namely:
- The claim was issued prematurely and was contrary to the Covid Commercial Landlord &Tenant Code of Practice
The judge gave this short shrift. "It is clear from the first paragraph of the Code that it does not affect the legal relationship between landlord and tenant" and "The Code is not a charter for tenants declining to pay any rent". The judge also found that the evidence, if anything, showed that it had been the tenant that had failed to engage with the landlord.
- The landlord was trying to exploit a 'loophole' in the restrictions on the recovery of rent put in place by the government and the intention of those measuresAgain, the judge was not persuaded. It was clear that the landlord was restricted from taking certain actions to recover rent but nothing prevented it bringing a claim for rent and seeking judgment on that claim.
- The landlord was in breach of its obligation to insure which ought to have included insuring against loss of rent due to forced closures in these circumstances.The judge found there was no obligation in the lease for the landlord to insure against notifiable diseases and/or government direction and that, even if there was, this would not assist as the lease did not require the landlord to insure against loss to the tenant's business. It was not relevant that the tenant was required to contribute to the landlord's insurance. Such losses were for the tenant to insure.
There was also consideration of the rent cesser provisions but the judge found there were no grounds to imply a term to extend these. There was a keep open clause in the lease which applied unless the tenant was prevented from doing so by an Insured Risk. The rent cesser provisions applied where there was physical damage to the premises and did not cover the situation where the premises were forced to close due to a legal requirement. The judge considered it would be difficult to draft any such term with precision, in any event it would contradict the terms of the lease and, fatally, such a term is not so obvious it did not need to be said (the relevant test for a term to be implied). "The lease apportions risk between the parties… and no further" the judge concluded.
On 22 April 2021, a further judgment followed from the High Court in Bank of New York Mellon (International) Ltd and another v Cine-UK Ltd and others. The circumstances were, again, familiar: a number of tenants had been unable to trade to varying degrees during periods of Government imposed lockdown related to the Covid-19 pandemic and arrears had accrued from March 2020. The landlords had pursued the arrears through the Court and subsequently made applications for summary judgment on their claims. In response, the tenants raised various grounds of defence, including:
- The landlords should have been negotiating with the tenants pursuant to the Code of Practice rather than pursuing litigation. The judge disagreed, and commented that the Code sits outside of the litigation process. As he put it: "I… do not see that the existence of a voluntary Code encouraging negotiation should in any way obstruct a claimant who contents that they have a clear case seeking summary judgement and, assuming that such a clear case is made out, from obtaining it at this point".
- The landlords had the benefit of pandemic insurance which covered loss of rent, with the effect that the tenants should not have to pay their rent.
- The rent cesser clauses should be construed to apply in these circumstances, interpreting "damage and destruction" to include inability to trade, or alternatively, terms to the same effect should be implied.
- There was a "temporary frustration" over the periods of lockdown and enforced closures of the premises, resulting in rent not being payable for such periods. The judge noted that "temporary frustration" is not a legal concept and he did not regard there as being any real prospect of it being shown that any of the leases had been fully frustrated.
All of these arguments failed, with the Court deciding that the tenants had failed to show any real prospects of success in defending the claims brought against them and there was no other compelling reason for there to be a trial.
Offering to Wash Up
The Government has updated its Code of Practice ("the Code") which is available here. This was first introduced in June 2020 to guide discussions during Covid-19. Although voluntary, the Code reinforces and promotes "best practice" amongst landlord and tenant relationships and aims to facilitate effective communication on Covid related arrears.
The update includes a two part template form which can be used by landlords and tenants as a platform to negotiate rent arrears and the tenant's ongoing contractual payment obligations.
The objective of part one of the template is for the tenant to provide some detail on the effect of Covid-19 on its business and to make a "reasoned and reasonable offer" to the landlord. In doing so, the tenant is expected to provide the following information:
- Historic rent payment records;
- 2020/21 turnover evidence;
- Rent payment records since 25 March 2020;
- Rent arrears offer representing either a percentage or lump sum payment to offset rent arrears; and
- Ongoing rent offer representing an affordable ongoing rent based on anticipated turnover;
- Service charge records since 25 March 2020;
- Service charge arrears offer;
Part two of the template allows the landlord to respond to the tenant's proposals by either accepting, rejecting (with reasons) and/or making a counter-offer.
The Code notes that significant reductions in arrears are unlikely and maintains that service charge and insurance costs should be paid in full by tenants.
It is also indicated that tenants should be proactive in approaching landlords and providing sufficient information so that the parties can understand each other's position and make decisions about how to proceed.
Although voluntary, the updated Code notes that courts will expect the parties to have exchanged sufficient information before commencing proceedings. At most, we expect that compliance with the precepts of the Code is only likely to be relevant to the costs of any claim. This is illustrated by the two cases reported above.
Calling a Fork a Fork
At what point will a party let into occupation of commercial premises whilst lease terms are being negotiated become a periodic tenant, with security of tenure? This question, which has arisen from time to time in the past, was one of a number of issues examined from an unusual perspective in the case of Smoke Club Ltd (in Administration (1) Kaymont Finance Limited (2) and Robert Alan Doyle (3) v Network Rail Infrastructure Limited. The issue was being litigated in the context of whether the alleged tenant, the Claimant, had a compensable interest under the Compensation Code for Network Rail's compulsory acquisition of the premises.
The Claimants asserted that in a meeting held in November 2008 with the landlord's representative, the parties reached a final and binding agreement by which they would be granted a lease of the Premises for 20 years at a rent not exceeding £50,000 per annum.
The Claimants claimed they relied on landlord's oral promises at this meeting to spend between £1.2 million to £1.5 million in fitting out the Premises to make it suitable for use as a nightclub, and thereafter ran their successful nightclub from the Premises. They relied on arguments of proprietary estoppel/constructive trust to support the status of their occupation. In the alternative, the Claimants argued that they had an annual periodic tenancy based on their occupation and payment of rent. In either case, the Claimants argued their occupation was protected by Part II of the Landlord and Tenant Act 1954.
The Defendant asserted that the Claimants had a tenancy at will, pending conclusion of the negotiations for the long lease. It argued that no final agreement could have been or was reached at the meeting in November 2008, and that its representative did not have the authority to reach a binding agreement on its behalf. It contended that an annual periodic tenancy could not be implied as the parties were still seeking to agree and document a long lease and had not pursued the option of granting an express annual tenancy in the interim.
The Tribunal found that only an agreement in principle had been made between the parties during their meeting in November 2008 and did not agree with the Claimants that a final and binding agreement was created. The Tribunal also accepted the Defendant's position that its representative at that meeting did not have the authority to make a final and binding agreement without approval from senior management.
The Tribunal did however find that the Claimants enjoyed an annual period tenancy, protected by the 1954 Act and so agreed that the Claimants did have a compensable interest in the Premises. The Tribunal found that although the parties were still engaged in negotiations for the grant of a long lease that did not imply that they did not agree to the grant of a lesser interest in the meantime. The Tribunal relied on two facts in reaching this decision, which were unique to this case:
- The parties did not have any objection in principle with the express grant to the Claimants of a periodic tenancy as an interim interest. The Defendant had given permission for a sub letting of part of the Premises to the Claimants, which meant that the Claimants had more of a substantial interest rather than a mere licence or tenancy at will; and
- As a periodic tenancy would attract security of tenure, which is not the case for a tenancy at will, this can be an important factor preventing the implication of a periodic tenancy. However, in this particular case, there was no issue at any stage about the Claimants being granted security of tenure.
This decision highlights the importance to both building owners and occupiers to document the status of any occupation. Certainty is always preferable on both sides, and of course all the more important for tenants investing significant sums into premises.
Insights from around the firm
- The rise of pop-ups in a post-lockdown world
- Legally brief: contemplating pursuing or defending a commercial dispute – what to do now?
- Public sector services delivery – an opportunity for change
While Covid-19 continues to dominate news headlines across the globe, there have been some uplifting stories:
- Children's TV legend Dame Floella Benjamin's youth to become 'uplifting' stage musical. Coming to England is based on her 1997 book about her journey from Trinidad and how she overcame the racism she encountered when she arrived. View the full story here.
- Nasa successfully flies small helicopter on Mars, the first powered, controlled flight by an aircraft on another world. View the full story here.
- Residents were stunned to see a herd of deer grazing outside their front doors on an estate in east London after the animals had crossed the busy A12 in Harold Hill, Romford, from their home in Dagnam Park. A local resident said: "it was lovely to see the entire community come out. I met more of my neighbours in one morning than in the five years that I've lived here". View the full story here.