Issue: Whether tenants of commercial premises remain responsible to pay their rents despite the enforced closure or inability to trade from their premises because of COVID-19 and COVID-19 Regulations?
The Claimant (Landlord) requested a summary judgment (CPR 14.2) to be made against the Defendants (tenants) for the rent of three (3) commercial premises that became due during the COVID-19 pandemic. The tenants are Cine-UK Limited (Cine-UK), Mecca Bingo Ltd and Sports Direct.com Retail Ltd. The landlords are Bank of New York Mellon (BNY / Superior landlords) and AEW respectively. The annual rent to be paid in advance by quarterly instalments on the usual days. The tenants claimed that the COVID-19 Regulations meant that public access was restricted to their business premises which eventually led to their closure for substantial periods. As a result, the tenants claim that they did not have to pay all or parts of the rent. The tenants believe they have a real prospect of defending the Claims based on the following reasons: the rent cesser clauses should be construed or be implied so that at least whilst the businesses are closed because of COVID -19 and COVID-19 Regulations and on the assumption that the landlords have insurance, they do not need to pay rent. Alternatively, the landlord is to recover the rent by their insurance. Even if the rent cesser clause did not have such effect by construction or implication, a similar effect could be achieved from suspensory frustration or an application of principles of supervening event in terms of illegality and or the doctrine of temporary failure of consideration. Finally, such effect could be achieved by an application of Government guidance requiring negotiations and ameliorative measures between landlords and tenants as it relates to the payment of rent during the pandemic.
The landlords’ position is this is a matter of allocation of risk in relation to events that were foreseeable and for which the tenants should have negotiated a cesser clause. They argue that the insurance may cover some liabilities to the landlord but does not extend to covering loss or rent where there are no relevant rent cessation provisions in the leases and the relevant tenants can pay. Therefore, the rent including the value added tax (VAT) and interest continue to fall due despite the COVID-19 Regulations and its effects.
Mecca Bingo and Sports Direct had additional claims concerning mistaken payments and miscalculations which they are seeking to recover, however the details of such claims will not be addressed herein.
Lease Agreements
The leases are written in a standard commercial form, for a defined number of years and after 18 months of closure, the Cine -UK lease would have 12.5 years to run or 2.5 years if the break clause were to be exercised, The Mecca and Sports Direct leases would have another 11 years to run.[1] There were provisions made in each lease for the insurance of specific events including against property loss or damage by insured risks. Equally relevant is the presence of a rent cesser clause in each lease where the property has been destroyed or damaged or access to it denied or the property is unfit for occupation and provided the insurance is not vitiated or payment of insurance monies is not refused as a result of the act or default of the tenant.[2] There is also an extension of cover clause for ‘Murder Suicide or Disease’[3] where insurers agree to indemnify the insured for loss of rent resulting from interruption of the business during the indemnity period following any human infectious or contagious disease manifested by any person whilst in the premises or within a 25 mile radius of it.
Issues: Construction of Rent Cesser Clauses
The landlords submit that the rent cesser clause would operate to only suspend rent where the insured risks have caused physical damage or destruction which prevents the premises from being fit for occupation or use. Conversely, the tenants maintain that the word “physical” was not used, thus they propose that what has happened is damage or destruction even though not of a physical nature. Even if destruction must be physical, damage which is used as an alternative to destruction, need not be.
Master Dagnall held that the usual meaning of the word damage relates to a physical state. The tenants referred to Halbury’s Law[4] definition of “damage” which had a wider meaning representing ‘any disadvantage suffered by a person as a result of the act or default of another…’, however “damage” as used in that context was based on the law of “damages” and not the lease of a property. Additionally, ‘damage or damaged’ was used as an alternative to destruction thus there must be a link to a physical item. Whereas the words ‘damage or damaged’ could apply to nonphysical events, it is imperative that the context in which the words are used is analysed. Throughout the agreement, ‘damage or damaged’ is used with or surrounded by words which connote a physical state for example ‘reinstatement work or physical remediation.’[5]. In any event, ‘it will be a stretch of the definition of the words “damage or damaged” if it should include nonphysical disadvantage as suggested by the tenants.’[6] Master Dagnall reasoned this would ‘introduce a modern colloquial meaning into standard form documents’[7].
The rent cesser clause is subject to the requirement that the inability to use the premises must be caused by physical damage or destruction and not a mere inability to use the premises without more. The real subject of the insurance is the property of the landlord, that is the ‘brick and mortar’, in other words the physical property rather than the ‘effects on the trade’.[8] Accordingly, the rent cesser clause will operate where the closure to the insured property is due to physical damage or destruction, it is not sufficient for it to be in consequence of closure without physical damage or destruction.[9] In concluding on this issue, the court agreed with the landlords’ that the rent cesser clause is only triggered by physical damage or destruction to the insured premises. This is also the natural meaning of the words ‘damage or damaged’ used on their own or in the context of the agreement.[10] Furthermore, this interpretation is consistent with a possible commercial purpose and in line with the ‘brick and mortar’ aspects of the provisions.
Implication of the Rent Cesser Clauses
Master Dagnall acknowledged that it would be fair and reasonable to imply the rent cesser clause as proposed by the tenants. Yet, it might be prejudicial to the insurers who may not have contemplated this liability when they agreed the premium even though it is their responsibility to consider both the expressed and implied terms of the relevant lease.[11]
There is no warranty in the leases that the premises can always be utilised for its permitted use but the obligation to pay the rent remains unless the parties agree otherwise. Moreover, if the parties intended for the rent cesser clause to operate where there is nonphysical damage, the parties should have expressly provided for this in the agreement. As such, the court agreed with the landlords’ that the lease sets out all the circumstances under which the rent cesser clause would apply including where an insured peril has occurred. Even though COVID-19 and COVID-19 Regulations may be unprecedented, in respect of SARS and the consequent fears, it is not convincing that COVID-19 and COVID-19 Regulations were unforeseeable.[12] The case is not fit for an ‘Aberdeeen implication’, because it is not clear what both parties would have intended if they were notified of the potential of and had considered COVID-19 and COVID-19 Regulations.[13] Based on the foregoing, Master Dagnell concluded that the tests for implication of the rent cesser clause proposed by the tenants was not met, therefore they do not have any real prospect of success for summary judgement on this issue.
Tenants’ reliance on the Insurance
Master Dagnall agreed with the landlords that the insurance policies do not compel the insurers to pay the landlords the outstanding rent where the rent cesser clause does not operate.[14] The court’s decision is influenced by the following points[15]:
- Without the operation of the rent cesser clause (no physical damage), the landlords who are the insured have not suffered any loss of rent.
- The landlords’ construction was in accordance with policy wording, particularly ‘the Murder, Suicide or Disease extension’. The policy provides that the insurer will indemnify for the loss of rent, which has not occurred. The loss to the landlords must have been due to the interruption of the landlords’ businesses which in the circumstances have also not occurred. If the premises were vacant and could not be leased due to COVID-19, that could have been reasoned differently but those were not the facts before the court.
- Even if damage could be extended to nonphysical loss, the other requirement mentioned in i. and ii. above must be satisfied.
- The commercial purpose of the insurance taken out by the landlords is to insure against the operation of the rent cesser clause which would have been a loss to them. If the tenants wanted to be protected in these circumstances, they would need to negotiate a wider rent cesser clause or alternatively purchase a separate business interruption insurance policy.
- The Mark Rowlands v Bermi[16] and Frasca-Judd v Golovina[17]. line of authority[18] relied on by the tenants was not accepted as directly on point. They are not concerned about what is covered by the insurance but with whether the insurance as it exists can be extended to protect the interests and loss of the tenants. Rather than being concerned about the liability for rent, it is concerned about the liability for remediation costs.
- Any suggestion that a clause be implied into the insurance policy that rent would be covered in the absence of a rent cesser clause cannot be accepted as either obvious or necessary for business efficacy. The insurance policy is well drafted and contains clauses specifically detailing the allocation of risks. Furthermore, the insurance is chiefly to protect the landlords against loss and to imply such a clause would be in contract with rules of implication.
Interpretation of the Insurance Provisions
Another point raised by the tenants is the breach of the insurance contract by the landlords who sought insurance coverage against COVID-19 and COVID-19 Regulations but not the sums equivalent to rent that would be loss from the closure or inability to use their premises. Additionally, the tenants insist that since they pay the premium for the insurance, they have the right to benefit from the insurance through cover for the rent.[19] The leases define COVID-19 and other diseases and Basic Rent as an ‘Insured Risk’ as such the tenants reasoned that since they pay for the insurance, it makes sense that when there are resultant closures, the insurer will pay for the rent or its equivalent. The landlords disagreed. They are of the view that this issue is governed by the rent cesser clause which describes when rent is payable following an insured risks which will eventually determine when the insurance covers the rent.[20]
Master Dagnall agreed with the Landlords ‘that the inclusion of something as an insured risk does not mean the landlord must include a clause in the insurance for the insurer to pay three (3) years of rent if the insured risk occurs and cause the closure of or prevented the permitted use of the premises.’[21] The fact that the tenants indirectly pay for the insurance does not mean the insurance must be tailored to benefit the tenants as suggested by implying such a term. The court also dismissed the notion that the implied term was required to give the lease business efficacy. The lease works well without the implied term. It provides for insurance against rent where a rent cesser clause applies in some instances and not in others. The tenants could have insured themselves against this risk by purchasing a separate and more appropriate insurance policy.
Frustration
Some of the tenants (Sports Direct, Mecca and Cine – UK) argued that there was a temporary frustration of their lease during the periods of lockdown hence rent not being payable during those periods. The landlords countered by stating there has been no frustration since ‘temporary frustration’ does not exist in law. Master Dagnall considered and applied National Carriers v Panalpina[22] and The Sea Angel[23]and held that the principle of frustration does apply to leases. Closure of the premises due to events outside the control of the parties is a supervening event, thus being capable of causing frustration of the lease but only on rare occasions. The relevant question is whether ‘the situation has become so radically different that the present situation is outside what was the reasonable contemplation of the parties so as it to render it unjust for the contract to continue?’[24]
COVID-19 and COVID-19 Regulations could qualify as a supervening event but in light of SARS, they were foreseeable but unprecedented.[25] While it was not reasonably expected by commercial people that the lockdowns would last for more than eighteen (18) months, there was significant amount of time remaining in each lease (Cine -UK another 12.5 years to run or 2.5 years if the break clause were to be exercised and Mecca Bingo and Sports Direct another 11 years each) in relation to the period of closure due to COVID-19 and COVID-19 Regulations. For this reason, there was no ‘radical difference’ nor was it unjust for the leases to continue bearing in mind their terms and the allocation of risks. There was no frustration of the leases. As for the tenant’s contention that the Sports Direct lease was temporarily frustrated, Master Dagnall rejected the tenant’s claims and agreed with the landlords that there is no such doctrine as temporary frustration in law. Frustration by definition and effect means the discharging and ending of the contract without the possibility to revive it hence it cannot be suspended.
Illegality
The tenants claim as well that they are relieved from their obligations to pay rent under the lease as its performance has become impossible based on its illegality. The landlords responded by agreeing that this is possible, however of no benefit to the tenants since it is not illegal for them to pay rent. It was held that the suspension of an obligation that is illegal does not excuse another obligation which is not interdependent or conditional upon the former. A suspension of the rent will only be allowed if a rent cesser clause can be invoked, however the tenants have failed to do so. Illegality of an obligation would not excuse the tenants from their obligation to pay rent.
Failure of Consideration
The final point raised by the tenants is that they are relieved from their obligation to pay rent due to partial failure of consideration arising from their inability to operate from and use the premises as permitted. Master Dagnall accepted that the tenants may successfully establish that they cannot trade from the premises as permitted by their lease however he refused to accept that would relieve the tenants of their obligation to pay rent. Moreover, ‘partial failure of consideration’ is not a separate principle; It is related to or dependent on a relevant principle of contract law, which the tenants have failed to establish.[26] The inability of the tenants to use the premises as permitted is not necessarily a ‘partial failure of consideration, instead it is an unexpected occurrence which means the leases are not as beneficial to the tenants as initially expected.[27] The landlords did not breach the contract and there was no provision for the rent to be suspended except for the limited circumstances provided for the application of the rent cesser clause. Based on the foregoing, the tenants were unable to rely on to COVID-19 or COVID-19 Regulations to counter claims against them for rent incurred during the period of interruption. The tenants must continue to pay the rent even for the period in which they could not use the premises as permitted because of COVID-19 and COVID-19 Regulations.
Comments
Bank of New York Mellon (International) Ltd v Cine-UK and other cases is among the recently decided cases addressing business interruption claims arising from COVID-19 and COVID-19 Regulations. It reveals to contractual parties, businesses, and insurers that an interruption to businesses caused or arising from COVID-19 and COVID-19 Regulations on its own may not be sufficient to successfully claim for business interruption and to compel the insurers to indemnify an assured for their loss. As demonstrated in this case, the legal obligations between a tenant and landlord will not change because of interruption to the business caused by COVID-19 and COVID-19 Regulations as this is not the fault of either party. It is important for tenants and landlords to recognise that the terms of the lease and insurance policies will determine the allocation of risks and that rent will only be suspended in accordance these terms and the scope of a rent cesser clause where expressly provided. The same is true for the interpretation of insurance clauses. Though an insurance policy may contain a business interruption clause or extension clause on ‘diseases’ that is wide enough to include COVID-19, the scope of its application will be limited based on the surrounding words of the clause. Therefore, if as in this case, the business interruption clause requires there to be ‘damage or destruction’ and there is no physical damage to property at the insured premises, the assured will not recover for loss merely because COVID-19 disrupted their business and caused financial or other nonphysical loss.
The context and surrounding words within which the clauses are written are very important to aid with their construction and it should not be assumed that ‘damage’ will take a wider meaning to cover nonphysical loss simply because COVID-19 is widespread and has affected many businesses. The identical concerns apply to the treatment of an extension clause on ‘diseases’ which for example covers COVID-19, its application to a scenario will depend on the other words or requirements of the clause and what makes commercial sense. COVID-19 Regulations have also not prohibited landlords from requesting the rents from tenants who can afford to pay, in fact the parties are encouraged to arrive at ameliorative settlements and where possible continue to meet their obligations under the lease. It will be difficult for a court to allow a rent cesser clause to implied into a lease written on a standard form if the test of obviousness and necessity are not satisfied. It is also difficult because standard clauses are usually well drafted, without errors, and deemed to have considered all possible circumstance.
A successful claim for frustration of a lease due to COVID-19 and COVID-19 Regulation is possible. However, what is of value is comparing the period of interruption with the outstanding period of the lease and then determine whether there has been such radical difference in the subject of the agreement that it would be unfair to continue the lease. Merely relying on the occurrence of COVID-19 and the length and extent of the lockdown are not adequate to satisfy this claim. Interestedly, Master Dagnall analysis throughout the judgment in relation to the issues raised were resolved by applying settled principles of law, thus we must be reminded that COVID-19 has not changed the fundamental principles of contractual interpretation, the law of frustration, law of implication and the obligations under a lease agreement. Nonetheless, the specific words of a clause, contract or insurance policy and their interpretation will be the key towards the success or failure of a claim involving COVID-19. More importantly, tenants and other business owners must ensure their business interruption policies and rent cesser clauses are drafted to make provision for loss due to nonphysical damage and loss of turnover.
[1] para 36.
[2] para 43.
[3] para 59.
[4] Volume 29 para 303.
[5] para 120.
[6] Ibid.
[7] para 120.
[8] [2021] EWHC 1013 (QB), para 126.
[9]ibid.
[10] para 127.
[11] para 140.
[12] para 148.
[13] Ibid.
[14] para 167.
[15] para 168.
[16] [1986] QB 211.
[17] [2016] 4 WLR 107.
[18] Essentially, the principle is that in a contractual relationship of landlord and tenant, where a landlord is indemnified by an insurer, the landlord cannot seek to also recover from the tenant in either contract or tort, otherwise that would effectively be double indemnity. The insurance taken out is to benefit both the tenant and the landlords.
[19] [2021] EWHC 1013 (QB), para 173.
[20] para 177.
[21] para 179.
[22] [1981] AC 675.
[23] [2007] EWCA Civ 547.
[24] [2021] EWHC 1013 (QB), para 209.
[25] ibid.
[26] [2021] EWHC 1013 (QB), para 221.
[27] Ibid.