The Balance of Power is the Scale of Peace
In the case of Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others  EWHC 1013 (QB) the High Court upheld three debt claims that were brought by landlords against Cine-UK, Mecca Bingo and Sports Direct. The key defences put forward by these substantial commercial entities included that the rent should have been suspended, that insurance applied for the tenant's benefit, that terms could be implied into the leases to negate liability and that the leases had been "temporarily frustrated", all of which failed.
Let’s look at these defences in a bit more detail:
- Rent cesser clause - The tenants argued that the rents in their leases should have been suspended since the pandemic had caused "damage" within the meaning of the rent suspension clauses in the event of which the landlord could claim on its insurance. The court, however, held that the terms of the rent cesser provisions were pretty standard and had never before been given the meaning ascribed to them by the tenants. For the avoidance of doubt, "damage" in this context meant physical damage or destruction to the actual premises but there was no physical damage in this case. Further, the purpose of the insurance policies was to protect the landlords' interests, not those of their tenants. Even where the landlords had been able to recover for loss of rent following non-payment by the tenants, the tenants should not obtain the benefit of this since the rent had not been suspended.
- Implied terms - The tenants argued that the leases should be construed to contain implied terms to suspend the rent in truly exceptional circumstances, such as in a COVID-19 pandemic. However, the court held that the leases were professionally drafted documents that appeared to intend to cover the parties' entire legal relationship. They included express rent cesser provisions which were limited to physical deterioration so it was not necessary to imply any such terms in the contract. The pandemic was unprecedented but was not wholly unforeseeable.
- Frustration - A contract is frustrated when it is rendered impossible to perform because of an unforeseen event that radically alters the relevant circumstances. The tenants argued that the pandemic had temporarily frustrated the leases so that rent was not payable for periods when their premises were closed. However, there was no such thing as a "temporary frustration" that effectively suspended a contract for a period of time.
- Compliance with the Code of Practice – In June 2020, the government issued a Code of Practice for commercial property relationships which strongly encouraged commercial landlords and tenants to negotiate ameliorative measures for tenants, including rent-free periods. However, the code was expressed to be voluntary and was outside the litigation process. The code was clear that tenants who were in a position to pay rent should do so, and that tenants were liable for payment obligations under their leases unless they renegotiated them. The tenants here were not claiming an inability to pay their rents. The code was therefore not applicable to them
The tenants argued that these were not simple debt claims, since complex matters of law were raised by the circumstances created by the pandemic and the background to each of the three disputes was different. As such, the tenants argued that the claims must be considered following a full trial. However, the court saw no prospect of the tenants' arguments succeeding at trial and no other compelling reason to proceed to a trial. The key defences failed on a summary basis and the tenants were ordered to pay up.
This tells us that landlords have the upper hand. However, the moratorium on forfeiture has been extended until 25 March 2022 and the government has announced that it will introduce legislation to ring-fence arrears for periods where the tenant has had to remain closed during COVID-19. Landlords and tenants will continue to be encouraged to reach an agreement in respect of COVID-19 arrears, but a new legally binding arbitration process will be introduced for cases where an agreement cannot be reached. The detail of the new legislation will emerge in the coming months, but it seems the new measures will only apply to arrears incurred by tenants forced to close during the pandemic. The government’s intention remains that tenants who can afford to pay should do so.
The question is, will this new legally binding arbitration process alter the balance of power again, especially if it will provide concessions for tenants by ring-fencing pandemic rents! This remains to be seen.
If there is a shift in the balance of power, what will happen to those cases which have already been decided in favour of the landlord, like the Bank of New York Mellon case, which might have had a different result if decided in the post-arbitration world.
- The essence of arbitration is a consensual process. One of the three remaining clauses of Magna Carta in our statute book deals with rights to justice and due process before the courts. Where parties have agreed to arbitrate, the arbitration clause will set out the types of disputes falling within the ambit of that clause that will be dealt with by arbitration. The effect of this agreement is to oust the jurisdiction of the court insofar as it relates to dealing with the dispute at first instance. The court only has a role arising from an arbitrated dispute on appeal. However, if parties are to have arbitration imposed upon them, then that appears unconstitutional, as the recourse to court proceedings is removed.
- The extent of the arbitrator’s powers is not clear. Will the arbitrator have jurisdiction to deal with defences of implied terms and frustration, or will it solely deal with how much, if any, of the COVID arrears should be ring-fenced?
- Did we all forget that arbitration is very expensive? Unlike court proceedings, arbitration is a wholly private process where the arbitrator has to be paid by the parties, and a venue has to be found and hired so that the arbitration can take place. On the other hand, aside from paying a court issue, court rooms and judges are free!
- There are presently a plethora of cases in the courts in relation to commercial rent arrears. It is not clear if those cases will now be stayed and placed into arbitration or whether they will continue as they are.
At the risk of sounding like a broken record, the law in this area is ever-evolving and all we can do is sit back and wait and see what will happen next. As highlighted in this article, there appears to be tension between the case of Bank of New York Mellon and the introduction of the new legally binding arbitration process. It will be interesting to see if and /or how the Government tips the scales.
Clearly, the government will need to seriously consider how it approaches the new legislation, along with having a good think about constitutional rights, the jurisdiction of an arbitrator, cost considerations and court resources.
Written by Associate, Priya Sejpal
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Disclaimer: This document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of BLM. Specialist legal advice should always be sought in any particular case.