English High Court considers whether Covid-19 regulations relieve tenants from obligation to pay rent

27 October 2021

Bank of New York Mellon (International) Ltd v Cine-UK Ltd
[2021] EWHC 1013 (QB)

In a judgment handed down earlier this year, the English High Court considered whether government regulations during the Covid-19 pandemic restricting the use of, and public access, to leased premises, resulting in closure of the businesses operating at the leased premises for substantial period time, absolved the tenants from liability for rent.

The decision of the English High Court is presently on appeal to the Court of Appeal.

Facts

The case concerned tenants under three separate leases (“Leases”) entered into at various times before 2020. In 2020, the UK Government introduced various regulations to tackle the spread of Covid-19, requiring the closure, or reduced operations, of many businesses. In this particular case, the leased premises (“Premises”) had to be closed to the public and, even where closure was not mandatory, it was not commercially feasible to operate at the Premises on a reduced basis.

The plaintiff landlords applied for summary judgment against their respective tenants for the rental arrears.

Rejection of tenants’ defences

In resisting the summary judgment application, the tenants argued that they were entitled to a suspension of rent while the Premises had to be closed because:

• rent cesser clauses in the Leases provided that where the Premises, or access thereto, had been damaged or destroyed by any of the insured risks, including disease, payment of at least some rent would be suspended;
• the Covid-19 pandemic and government regulations in response thereto amounted to temporary frustration of the Leases and/or supervening illegality; and
• there was a partial failure of consideration in respect of the Leases.

The High Court rejected all of the tenants’ arguments and granted summary judgment in favour of the landlords.

Rent cesser clauses

The court disagreed with the tenants’ contended interpretation that the rent cesser clauses operated to suspend rent where the tenants were unable to enjoy the use of Premises and not only where the Premises were damaged or destroyed.

The court instead held that the rent cesser clauses applied only where there was physical damage or destruction to the Premises, noting that the commercial purpose of the rent cesser clauses was to protect “bricks and mortar” rather than “effects of trade” consequences.

The court also refused to imply a term into the Leases that payment of rent would be suspended while the Premises had to be closed because of the Covid-related regulations.

As the Leases were standard-form, professionally drafted and intended to cover the entire legal relationship between the parties, it was not obvious that the parties would have intended to provide for rent suspension where the businesses were forced to close and not just where there was physical deterioration (damage or destruction) of the Premises. It was also not necessary to imply the proposed term as the Leases were effective even without the proposed implied term. The court noted that the implication proposed by the tenants came close to contradicting the express limitation (damage or destruction of the Premises) in the rent cesser clauses and that it was open to the tenants to have insured themselves for risks not covered by the rent cesser clauses.

Temporary frustration and supervening illegality

The court disagreed with the tenants’ argument that the rents should be suspended at least whilst the Premises were or had to be closed, because the Covid-19 pandemic and regulations gave rise to (a) a temporary frustration (following which the Leases would continue to take effect), and/or (b) a supervening illegality.

The frustration argument failed outright as there is no legal doctrine of “temporary frustration”. If the alleged frustration did not discharge the entire contract, it was not possible to contend that the alleged event of frustration suspended the contract “temporarily”.

Likewise, the Covid-19 pandemic and regulations did not constitute a supervening illegality as the pandemic and regulations did not make the performance of the tenants’ obligations (primarily to pay rent) illegal.

Partial failure of consideration

Finally, the tenants argued that there was a partial failure of consideration in respect of the Leases as the tenants were unable to trade in ways contemplated by the Leases.

This argument was rejected as the Leases did not provide that payment of rent was dependent upon the tenants being able to trade from the Premises, except in the limited circumstances of the rent cesser clauses (which applied only where there was physical damage or destruction to the Premises).

Concluding remarks

This is one of the first cases which fully considered whether government restrictions limiting the use of leased promises during the Covid-19 pandemic suspended a tenant’s obligation to pay rent. In this case, the tenants raised the full gamut of arguments (deploying arguments of considerable ingenuity and sophistication) to avoid payment of rent.

All of these arguments were roundly rejected by the English High Court on the basis that the Leases were standard-form, professionally drafted documents which appeared to have been prepared with care and the tenants’ obligation to continue to pay rent even if they were unable to conduct business from the Premises reflected the parties’ agreed allocation of risks.

This case would be persuasive authority in a Singapore court in a case interpreting similarly-worded rent cesser clauses and involving attempts by tenants to suspend payment of rent in reliance on the doctrines of frustration, supervening illegality and partial failure of consideration. In this regard, rent cesser clauses being triggered by damage or destruction of the leased premises are quite common in Singapore.

Further information

Allen & Gledhill has a Covid-19 Resource Centre on our website www.allenandgledhill.com that contains knowhow and materials on legal and regulatory aspects of the Covid-19 crisis. 

In addition, we have a cross-disciplinary Covid-19 Legal Task Force consisting of Partners across various practice areas to provide rapid assistance. Should you have any queries, please do not hesitate to get in touch with us at covid19taskforce@allenandgledhill.com.