Where do we stand on Covid rents?

Mark Sefton QC and Anthony Tanney look at the uncertain position for landlords and tenants when the courts are aware of the government’s proposals for a binding arbitration process for pandemic rent arrears disputes. Tenants have not done very well so far in their attempts to avoid paying rent for the lockdown. Landlords have not been able to forfeit leases, of course. But they have been able to sue for money judgments, and that is exactly what they have been doing. So far, three summary judgment applications for pandemic-related rent arrears have come before a judge, and the score now stands at 3-0 to the landlords. Tenants appear to have argued every conceivable point and more, and they have failed on absolutely everything. First in Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863 (Ch); [2021] PLSCS 74 and Bank of New York Mellon (International) Ltd v Cine-UK Ltd and other appeals [2021] EWHC 1013 (QB); [2021] PLSCS 80, both in April, and, most recently, last month in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2021] EWHC 2591 (Ch); [2021] PLSCS 165. There is an appeal pending in Bank of New York Mellon, and more appeals could follow. Maybe a tenant will eventually win a point. But until that day arrives, perhaps there is a different way of looking at this particular problem if you are one of those tenants who had to shut down your business during the pandemic. The arbitration ambition It is well known, of course, that the government published an important policy paper on 4 August 2021. Before this point, the government had relied on a voluntary code of practice that was supposed to “encourage” landlords and tenants to “work together”. But that was hopeless, as anyone could have predicted. So now the government has changed direction and is going to legislate to “set out a process of binding arbitration” for landlords and tenants. These binding arbitrations are to deal with the rent arrears that accrued during the pandemic as a result of the enforced closure of business premises. This August policy paper followed an earlier call for evidence by the government, to which a majority of tenants had responded, saying that landlords were not playing ball. They were not agreeing to grant rent reductions. The government says that has to change, and it is going to legislate to make sure of it. The policy paper states that landlords are expected to “share the financial burden with tenants” and defer or waive an “appropriate proportion” of any pandemic-related rent arrears. The resulting legislation appears likely to follow the Australian example, where there was a mandatory code requiring landlords to grant rent reductions to tenants in proportion to the tenant’s reduction in trade during the course of the pandemic, up to as much as 100% of the amount that would otherwise be payable. A retail or hospitality tenant in Australia whose turnover had dropped to nil could therefore potentially insist that the whole of the rent arrears for that period be deferred or waived. Where does that leave us? All that is very interesting, of course, but that is all in the future. What about the here and now? What if you are a tenant facing a summary judgment today? Surely the court has to apply the law as it stands now, not the law as it might become if and when the government gets around to legislating? In fact, the position is not nearly that black and white. In May last year, in an insolvency context, Birss J had to deal with a strikingly similar problem, in a case called Travelodge Hotels Ltd v Prime Aesthetics Ltd and others [2020] EWHC 1217 (Ch); [2020] EWHC 1217 (Ch). Travelodge had had a thriving business before the pandemic struck. But its hotels had to close with the lockdown, and the pandemic caused revenue to drop by 95%. Prime Aesthetics was a creditor and threatened to present a winding-up petition. But just before it did that, the government issued a press release saying it was going to legislate to prevent companies from being wound up in cases where the debt had been caused by the pandemic. On the back of this, Travelodge applied for an injunction to restrain Prime Aesthetics from presenting a winding-up petition. Its case was that, if the law was changed in the way the government had said it was going to change, then this would create a defence to the winding-up petition. That application was not, at first glance, a very promising one. In a slightly earlier case, Harper v Camden London Borough Council; Shorts Gardens LLP v Camden London Borough Council [2020] EWHC 1001 (Ch); [2020] PLSCS 77, Snowden J had rejected a pretty much identical application on the grounds that the court had to proceed on the basis of the law as it stood at the date of the application, not on the basis of the law as it might become in the future. But Birss J in Travelodge did not agree with that. Instead, he applied a line of authorities that had not been cited to Snowden J, which said that an impending legislative change can be a material consideration to the exercise of the court’s procedural powers or discretion. That line of cases held that the court does not necessarily have to make its decision only on the basis of the law as it is at the date of the hearing. In an appropriate case, it can take into account imminent changes in the law. In Travelodge, it was not certain that legislation would be enacted, and it was unclear what exact form it was going take. But if the government did broadly what it had said it was going to do, then this would affect the merits of the winding-up petition. That meant the right thing to do was to preserve the status quo and stop the creditor winding up the company in the meantime. In a second case, Re a Company [2020] EWHC 1406 (Ch), Morgan J took the same approach. He too was hearing an application to restrain a winding-up petition. He distilled the caselaw into the single proposition that: when a court is deciding whether to grant relief and, in particular, relief which involves the court controlling or managing its own processes, it can take into account its assessment of the likelihood of a change in the law which would be relevant to its decision. How does that help a tenant faced with a claim for pandemic-related rent arrears? First, it is clear from the policy paper that the government intends to legislate in connection with Covid-related rent arrears. The policy paper says so unequivocally in the first sentence. Second, the precise shape of that legislation is not known. But the basic outline is fairly clear. The government is no longer just going to encourage landlords to grant rent reductions. It is going to force them to do that, and impose them through a binding arbitral process if they do not agree it voluntarily. Moreover, there are some fairly clear hints about how the rent reductions are going to be calculated. The policy paper nods to the Australian scheme, and says the government expects landlords to “share the financial burden” of the pandemic with tenants and defer or waive an “appropriate proportion” of pandemic-related rent arrears. All of that suggests the scheme the government intends is one where tenants will be entitled to insist on retrospective rent reductions in proportion to their reduction in trade resulting from the pandemic. There is therefore a significant likelihood that, depending on the tenant’s exact situation, the intended legislation will be relevant to the merits of an existing claim for rent arrears. Third, the court has a variety of tools it can use to regulate its own processes. It can stay proceedings, or it can adjourn them. It can decline to grant summary judgment if there is a compelling reason for not disposing of the case summarily. If it lets the case go ahead, then the rent will have to be paid and the pass will be sold. It is quite possible that a court will be persuaded not to let that happen, and instead to regulate its own procedures to preserve the status quo until the promised legislation is brought into force. Mark Sefton QC and Anthony Tanney are barristers at Falcon Chambers Photo by Chris Fairweather/Huw Evans/Shutterstock