Commercial Rent (Coronavirus) Bill – billions in the balance

Andrew Todd and Chris Ives ask, will the proposed arbitration process mean that insurers will be asked to pay a bigger share of pandemic rent arrears? The UK government has issued draft legislation (the Commercial Rent (Coronavirus) Bill) providing for a process of binding arbitration for landlords and tenants in relation to the issue of commercial rent arrears that have accrued over the course of the pandemic. These arrears have been estimated to be worth in excess of £7bn. The proposed legislation empowers an arbitrator to make a binding award as to the extent to which rent accrued since March 2020 should be deferred or waived. One area that will need to be carefully addressed is the extent to which an arbitrator may also consider the position of the landlord and, in particular, whether the landlord is insured in respect of loss of rent. Under section 16(2)(b) of the bill, the arbitrator (when assessing the viability of the tenant’s business so as to aim to issue an award that is consistent with preserving the landlord’s solvency) must (as far as they know) have regard to “any other information relating to the financial position of the landlord that the arbitrator considers appropriate”. Therefore, you can see a landlord’s insurance position on loss of rent could be relevant. Limits on liability Many commercial landlords carry loss-of-rent insurance, which has traditionally been relied on to cover rent not paid because a tenant has been unable to use its premises following the occurrence of physical damage, such as fire. However, many of these policies also insure loss of rent caused by a peril other than physical damage – for example, an outbreak of a notifiable disease within a specified radius of premises or public authorities ordering the closure of premises due to an emergency within the vicinity. Many of these “non-damage” clauses are similar to those considered by the Supreme Court in Financial Conduct Authority v Arch Insurance Ltd and others [2021] UKSC 1; [2021] EGLR 12, which allowed policyholders to claim for business interruption losses under these clauses finding, essentially, that national lockdown measures and the closure of premises were caused by local occurrences of Covid-19, and not only the national outbreak. Many landlords have brought claims under their loss-of-rent policies in reliance on the FCA decision, however the response by insurers has typically been to argue that coverage is only triggered in respect of loss of rent receivable, and that where rent remains payable under the terms of a lease, it is still receivable under a literal interpretation of the policy, and there is no entitlement to an indemnity. There have not been any findings by English courts that insurance policies should be interpreted in this way, and there are counter arguments which landlords can bring in this regard (for example, is rent still receivable within the context of the insurance policy where a tenant is insolvent?). Nevertheless, if a court or arbitral panel agreed with insurers that policies should be interpreted literally in this manner, that would deprive landlords of the ability to claim on current legal principles. This is because while there have been several attempts by tenants to argue to the contrary in response to summary judgment applications by landlords, rent cessation clauses in commercial leases are typically triggered only by the occurrence of physical damage to premises (such as fire, flood, etc), and not closure due to a pandemic. A recent example of this was in Atmore Centres Ltd v TFS Stores Ltd (Liverpool County Court, 1 November 2021), where the court awarded default judgment in favour of the claimant landlord, rejecting in the process the tenant’s argument that the landlord was in breach of its covenant to insure in not insuring loss of rent related to forced closures and/or denial of access. If courts continue to interpret rent cessers and leases in this way, insurers will likely be able to sustain the argument that rent remains receivable and there is no entitlement to an indemnity. What will arbitration mean for insurers? One of the interesting issues with the proposed arbitration procedure for landlords who have had claims declined by their insurers (and their tenants) is whether a determination by an arbitrator that rent is deferred or waived (“relief from payment of a protected rent debt” – section 6(2)) means this rent is no longer “receivable” in the context of the insurance policy. While such a finding may mean that a landlord cannot recover this rent from a tenant, it may crystallise the landlord’s ability to claim on its insurance policy. Looked at in this way, the extent to which a landlord is insured in respect of loss of rent could be a relevant factor in any arbitration (and in settlement discussions between landlords and tenants, bearing in mind parties are encouraged to negotiate). Quite apart from the myriad legal issues, in determining who should bear responsibility for unpaid rent arrears where insurers have accepted premiums for providing “non-damage” cover, and where tenants have contributed to the cost of this insurance, society as a whole is unlikely to consider it unreasonable that insurers should be required to share some of the burden. Even if the arbitration process unlocks landlords’ abilities to claim, policies will contain limits of indemnity in relation to non-damaged clauses (eg capped at three or six months’ loss of rent), which will go some way to ensuring losses are allocated proportionately. Both landlords and tenants will presumably welcome clarity in respect of the proposed arbitration scheme. Most would agree that requiring insurers to share some of the pandemic rent arrears pain would be a reasonable outcome. Chris Ives is a principal associate in the insurance and reinsurance team and Andrew Todd is a partner in the real estate dispute resolution team at Eversheds Sutherland Photo by Anastasia Shuraeva from Pexels