Rent during Covid-19: landlords still hold the strongest hand 15 April 2020
Since the outbreak of the coronavirus pandemic and the coming into force of the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (the Regulations) much ink has been spilled about the frustration of leases. While the rapidly expanding body of literature makes interesting reading, it is largely irrelevant for real-world landlords and tenants. No one really wants to argue frustration. Tenants may not want to pay rent, but (unless quitting their business altogether, in which case they may not be overly concerned about past rent) they certainly don’t want to be out on their ear: a necessary corollary of a successful frustration plea.
Indeed, in all but a handful of specific cases (perhaps the shortest of seasonal leases?) frustration is bound to fail: a temporary interference does not remove “all or substantially all of the benefit that one party receives from the contract” nor does it frustrate the common purpose for entering that lease: Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 Ch; [2019] EGLR 17 (see also the Hong Kong SARS case of Wing v Xiong [2003] HKDC 54).
Now astute practitioners, aware of the non-commerciality of frustration, have focused their sights on a seemingly more attractive proposition: suspension of rent during the lockdown. By differing routes, lawyers pitching to coronavirus-hit tenants are increasingly raising hopes that rent may not have to be paid during this hiatus.
This article seeks to debunk those myths: landlords need not fear them and tenants ought not believe them.
The starting point
The unassailable starting point is that rent has to be paid. Nothing in the Coronavirus Act 2020 (the Act) dictates the contrary; rather it is assumed that the rental liability continues (section 82).
Therefore, to obtain a rent suspension a tenant will have to point to something either within the contract itself or appeal to a common law principle which can be superimposed.
Suspension of building covenants repurposed?
Some take encouragement from cases where tenants successfully argued that particular leasehold building covenants were prospectively discharged despite the interruption being insufficient to frustrate the lease: see John Lewis Properties plc v Viscount Chelsea [1993] 2 EGLR 77, where the landlord was not entitled to forfeit for a tenant’s failure to demolish and develop as a result of the site’s Grade II* status; there was a lawful excuse for non-performance.
However, that decision makes plain, as did the House of Lords in Cricklewood Property & Investment Trust Ltd v Leighton Investment Trust Ltd [1945] AC 221, that such an argument does not apply to the covenant to pay rent.
The reasoning in such cases is that there is a “lawful excuse” for non-performance of the building obligation. The same is not true in respect of rent: it is not unlawful to pay rent to the landlord. That obligation is wholly unaffected by the pandemic, the Act and the Regulations. As Lord Porter put it in Cricklewood, at [241]: “…the rent is payable for the site and issues out of the land… the land in some form is there and the payment of rent is not prohibited.”
Supervening illegality
Another argument doing the rounds is that the Regulations make the use, occupation and enjoyment of the premises illegal and, therefore, vitally and fundamentally affect the nature of the performance contemplated by the parties when the contract was made: Denny, Mott & Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265.
First, let us remember what the Regulations actually do: Schedule 2 lists the (many) businesses which must close during the emergency period and it is an offence to contravene the Regulations without reasonable excuse.
Second, let us recall one of the principal distinctions in property law: use and possession. Use is not possession. Possession is the core right granted to the tenant by a lease – the right to exclude the remainder of the world from the premises: Street v Mountford [1985] 1 EGLR 128.
Therefore, the argument that the Regulations fundamentally affect the performance proceeds on a mistaken premise. The use of the premises is not fundamental to the lease: the core right is that of possession. The tenant retains that. Indeed, the anti-enforcement provisions in the Act (sections 82-83) make that plain.
There is nothing in the Regulations to detract from the tenant’s right to possession. Only the tenant may bring injunctive relief proceedings to remove a trespasser (whether squatter or landlord). The tenant may continue to store its business items on site: the Regulations do not say otherwise. Indeed, a tenant almost certainly remains in occupation for the purposes of the Landlord and Tenant Act 1954 and, where reasonably necessary, its employees may still attend the site.
So much is plain from the well-established body of case law in the wartime context. In the Civil War case of Paradine v Jane (1646) Aleyn 26 (approved by the House of Lords in Matthey v Curling [1922] 2 AC 180, where state requisitioning of land and military occupation was no answer to a claim for rent) it was held that being forcibly removed from the property by an invading army does not remove the obligation to pay rent; see also London and Northern Estates Company v Schlesinger [1916] 1 KB 20. Nor does dying absolve a residential tenant from paying rent: see Youngmin v Heath [1974] 1 WLR 135.
It seems most unlikely that the temporary interference with trading from a site imposed by the Regulations can achieve that which war and death cannot.
Implied term?
Two different routes have been proposed to arrive at an implied term; both healthy exercise leading to a dead end.
First, it is suggested that Krell v Henry [1903] 2 KB 740 might assist: there the cancellation of King Edward VII’s coronation frustrated the licensed hire of a flat as there was an implied term the coronation would go ahead. But in that case there was a contemplated specific event; its timing was crucial to the contract. The Regulations provide a temporary interference with the use of business premises; there is no once in time event.
Second, more subtle, is the argument that a term should be implied where an event not contemplated by the parties occurs, where it is clear what the parties would have intended: Aberdeen City Council v Stewart Milne Group [2011] UKSC 56 and Arnold v Britton [2015] UKSC 36; [2015] EGLR 53.
Sadly for tenants, there is no such room in the case of a pandemic. First, almost every commercial lease will contain a rent abatement clause which sets out the occasions when the rent will cease to be payable (temporarily). Where the parties have expressly contemplated the situations which will give rise to relief it is difficult, if not impossible, to see how that term could be expanded by implication. Indeed, a term will only be implied where the contract is otherwise “inherently unworkable” and necessary for business efficacy: Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd and another [2015] UKSC 72; [2016] EGLR 8.
Second, it is far from obvious that the officious bystander would elicit the same response from both parties had the question been posed. Why would a landlord agree to bear the burden of the loss of rental income during a pandemic, especially where parliament has legislated but chosen to leave the rental liability unaffected, afforded some rates relief and saved wages through the furlough scheme? There is no obvious answer to which both landlord and tenant would subscribe; therefore, there can be no implied term in such circumstances.
The way forward
The commercial reality is that many tenants will not be able to pay their rent as it falls due: grinding to a standstill will decimate businesses, which will need to be built back up. While some landlords will relish the opportunity to remove an awkward tenant, most will know there are limited better options in the current market and will take a commercial and pragmatic view.
The lesson for landlords in this article is: you can afford to be robust in negotiations. Absent a legal earthquake, your legal position (subject to the specific lease provisions) is solid and you ought not to fear such creative legal arguments.
As for tenants: it might be better for you to use what limited resources you have to pay the rent rather than the speculative lawyers’ fees.
This article was first published in the Estates Gazette on 15 April 2020.
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