The landlord of Westfield London has won an early victory in a case against their tenant TFS Stores Limited for payment of rental arrears dating back to April 2020, together with service charge. This is the first reported judgment where a landlord has sued its tenant for non-payment of rent during the COVID-19 crisis.
The landlord obtained an order for summary judgment against its tenant on the basis that it had no real prospect of defending the claim to recover the rental arrears and there were no compelling reasons why the claim should go to a full trial. While there was no full trial, various arguments were raised by both sides which present points of interest. In particular, whether the tenant's obligation to pay rent during lockdown should be suspended when the landlord has the benefit of insurance for loss of rent, even if this is not explicitly provided for in the lease.
This may not be the last we see of this case as TFS tried to adjourn the hearing at short notice and amend their Defence, which they were not permitted to do. If TFS decides to appeal the judgment against them, we would expect to see a revised Defence, likely expanding on the arguments around the proper interpretation of the rent cesser clause in the Lease.
TFS Stores Limited (TFS) is the tenant of premises at Westfield London under the terms of a five year lease dated 10 July 2019 (Lease). TFS trades as "The Fragrance Shop". Commerz Real, the fund manager which owns the Westfield Centre in a joint venture with Unibail-Rodamco-Westfield, is TFS' landlord (Landlord). The rent due under the Lease was £200,000 per annum excluding VAT, although the parties varied this by a side letter to provide for a Base Rent of £180,000 plus Turnover Rent.
TFS were obliged to close the premises under the government's coronavirus restrictions from 26 March 2020 to 15 June 2020. The premises were then closed again between 5 November and 2 December 2020 and then from 19 December 2020 until 12 April 2021. TFS paid no rent after April 2020, and there were also some arrears of service charge. The Landlord issued a money claim seeking payment of £166,884.82 (inclusive of VAT) plus interest. TFS defended the claim on three broad grounds:
- That the Landlord was in breach of its obligations under the government's "Code of Practice for commercial property relationships during the COVID-19 pandemic";
- That the Landlord was exploiting a "loophole" in the coronavirus legislation which was designed to protect tenants who could not pay from aggressive action by landlords; and
- That the Landlord should have made a claim under its insurance policy for loss of rent.
The first two elements of TFS' defence were dealt with fairly swiftly. Chief Master Marsh confirmed that the Code of Practice does not affect the legal relationships between landlords and tenants and simply sets out what the Government considered should be best practice in discussions around non-payment of rent due to the pandemic. The parties had in fact been in discussions for some time and Chief Master Marsh found no evidence of failure to engage on the part of the Landlord.
As regards the exploitation of a "loophole", Chief Master Marsh also dealt with this succinctly. There is nothing in the Coronavirus legislation or regulations which would fetter a landlord's ability to sue a tenant to recover monies due under a lease. The various legislative measures which have been put in place include limiting a landlord's ability to exercise its self-help remedy of forfeiture, or to seize goods under CRAR, and to serve a statutory demand and/or wind-up a tenant company. This means that enforcement of any judgment may be difficult while these measures are in place but there is nothing to stop a landlord obtaining a judgment that the monies are due and owing.
The arguments regarding insurance were a little more complicated, but Chief Master Marsh felt that he could deal with these at a summary judgment hearing.
As always, the precise wording of the relevant clauses of the Lease determined the outcome of this matter. Under the terms of the Lease, the Landlord was required to obtain insurance for certain specified risks (Insured Risks). The Lease permitted the Landlord to insure against such other risks as it saw fit, at its discretion. The Lease also included a rent cesser clause, which provided that rent would be suspended under certain circumstances, mainly where the premises and/or the wider shopping centre were damaged by an Insured Risk.
Pandemic was not one of the Insured Risks, and Chief Master Marsh decided that the Landlord was not required to insure against this specific risk. However, as it happened, the Landlord's insurance policy did cover damage caused by a "notifiable disease" (which it was agreed that COVID-19 is). The Landlord claimed that it could not make a claim under this policy as the rent cesser clause had not been triggered and therefore the Landlord had suffered no loss. The Landlord would only suffer an insurable loss if the rent cesser clause was triggered and the requirement to pay rent was suspended.
TFS tried to argue that there should be an implied term in the rent cesser clause which would provide that the rent would be suspended in the event that the premises and the wider shopping centre were closed as a result of government action. Due to some confusion about the precise terms of the Landlord's insurance policy, TFS did not have the opportunity to fully flesh out their position on this question and their application to revise their Defence was denied as the application was not made promptly.
Chief Master Marsh agreed with the Landlord's interpretation of the Lease and awarded judgment for the full amount plus interest to the Landlord. While on the face of it this may seem somewhat unfair, given that the Landlord did have the benefit of an insurance policy where notifiable disease was an insured risk, the issue was that the losses covered by the Landlord's insurance policy were the Landlord's losses and not those of TFS. Chief Master Marsh commented that it was not for the Landlord to insure the losses of the tenant which would in the normal way be covered by a tenant's business interruption insurance policy.
This case is certainly good news for landlords and indicates that the Court is not afraid to use the summary judgment procedure, even in these unprecedented times. As Chief Master Marsh put it, this was a very straightforward case and TFS had failed to put forward any arguments which would have a reasonable prospect of succeeding at trial. This is the first reported case dealing with a money claim by a landlord against a tenant which has been forced to close for a very significant period of time but it will certainly not be the last. If TFS decide to appeal the summary judgment we would expect to see a reformulated Defence, including a reworked pleading on construction and implied terms.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.