The ground-breaking Covid Commercial Rent Arrears arbitration scheme imposed a moratorium on landlord’s enforcement action for ringfenced arrears until 23 September 2022. Tenants have not, on the whole utilised the scheme. As the end-date looms closer and there are no whispers of an extension (unsurprising in the wake of the reshufflings at Downing Street… there are likely one or two items further up their current agenda!), debt enforcement action is on the rise and we are seeing an upturn in landlords and developers considering all of the options open to them to protect income streams in their investments.
In this blog, we highlight two recent cases which will only serve to bolster landlords considering action against defaulting tenants for Covid-19 period arrears.
Landlord secures summary judgment for £141,000 of rent arrears from former tenant and guarantor, dismissing claims that the assignee tenant’s court sanctioned restructuring plan varied the lease or released their liability
Oceanfill Ltd v Nuffield Health Wellbeing Ltd & Cannons Group Limited
This case concerned a gym in Leeds, originally let to Nuffield Health and later assigned to Virgin Active. Nuffield and their guarantor, Cannon, guaranteed Virgin Active’s performance of the lease covenants in the Licence to Assign.
In 2021, the High Court approved a part 26A restructuring plan for Virgin Active under the Companies Act 2006. The effect for the landlord, Oceanfill, was that all past, present and future payments which Virgin Active were obliged to make under the lease were compromised. Oceanfill received a lump sum under the restructuring plan, but it fell (very) short, so it issued proceedings against Nuffield and Cannon for the shortfall.
The defendants argued that the restructuring plan had varied the lease so that payments had not fallen due to invoke their obligation to pay under the term of the Licence. In the alternative, they argued that the restructuring plan operated as a variation of the lease and as they had not consented to any variations, it had released their obligations in the Licence.
Both defences failed. Whilst the restructuring plan released the tenant’s liability, it did not vary the terms of the lease. The Licence was clearly drafted that a release would not arise on a variation of the lease but could only be given under seal (ie in a formal deed of release).
Court of Appeal dismisses “Covid defences” based on implied terms and failure of basis
Bank of New York Mellon (International) Ltd v Cine-UK Ltd; London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others
Avid readers of our blog will recall our previous posts on these cases. The High Court acknowledged that for certain periods it was unlawful to operate the premises as a cinema due to Covid-19 restrictions, and at other times it was uneconomic to do so. But there was no real prospect of the tenants establishing that terms should be implied to the effect that the payment obligations under the leases were suspended during those periods. Nor was there any real prospect of establishing that there had, in the circumstances, been a “failure of basis“. As such, the tenants could not avoid paying rent for the affected period. However, the tenants appealed, leaving uncertainty for landlords with similar cases.
The Court of Appeal has now dismissed appeals against the grant of summary judgment to commercial landlords for payment of accrued rent in two cases where the relevant premises (in each case operated as cinemas) had to be closed for extended periods due to Covid restrictions.
Click here for our full article analysing these cases (previously published on our Litigation Notes blog).
Of course, court proceedings against the tenant or a third-party guarantor are just a couple of the options in the suite of remedies that may be available to a landlord of commercial premises, now that the various moratoriums imposed during the Covid-19 period have expired (and assuming that the arbitration scheme is not extended). Which remedy will be the appropriate next step for landlords will depend on many factors, including the relationship between the parties, the viability of the tenant’s business and whether it holds assets against which a judgment may ultimately be enforced. For forfeiture, the potential for reletting will be critical. However, with the ‘cost of living crisis’ and businesses buckling under the weight of energy costs, landlords will be monitoring tenant default particularly closely over the coming months.