Anna Duffy and Imogen Gray of DTM Legal were successful in opposing an application seeking a stay of proceedings on 8th November 2021 in the Liverpool County Court. Gary Cowen QC of Falcon Chambers was instructed by the DTM Legal team who acted for the Landlord, Mapeley Beta Acquisition Co (1) Limited the owner of premises at 18 King William Street, London.
The Tenant, London KWS Centre Limited who provide serviced offices issued an application seeking a stay of the proceedings brought by the Landlord, for non payment of rent, service charge and electricity. The Tenant’s application was based on two grounds: the first and primary reason was that the Government proposed to legislate for rent arrears accrued during Covid 19. On 4th August 2021 the Government published a policy paper which explained that it intended to legislate to “set out a process of binding arbitration” for landlords and tenants. The August paper explained the following:
A The Government plan would follow other countries such as Australia (where a mandatory code was introduced requiring landlords to grant rent reductions to tenants in proportion to the tenant’s reduction in trade during the pandemic).
B The legislation would ringfence debt accrued from March 2020 for commercial tenants affected by Covid.
C Where agreement could not be reached, the parties would be required to undertake “binding arbitration”
D It is the Government’s expectation that landlords should share the financial burden with tenants where they are able to do so and give tenants breathing space to agree new terms.
E That clear rules which will help ensure impartiality and to manage the cost of the process to both landlord and tenants. The arbitration process should be seen as a last resort; strong preference is for landlords and tenants to use the principles which would be set out in legislation and signalled through an updated Code of Practice to reach agreement.
The second reason was that there is a pending appeal in Bank of New York (International) Ltd v Cine-UK Ltd which was to be given a measure of expedition and heard by the end of March 2022. One argument of particular relevance which will be considered by the Court of Appeal, and which the Tenant in this case would seek to rely on to defend these proceedings, is the extent to which the doctrine of failure of consideration might apply to relieve a tenant from its liability to pay rent in these circumstances. The issue will require the Court of Appeal to determine whether there has been a doctrine of “partial failure of consideration” and how it might apply where there has been a failure of a state of affairs on which an agreement was premised, or alternatively whether how failure of consideration can apply to a lease and, in either case, whether rent under a lease is entire or divisible.
The Landlord in this case had previously entered into deferred terms to assist the Tenant and varied the terms of the Lease but on each occasion the Tenant had reneged on those terms leaving rent, service charge and electricity owed just short of £500,000. The Landlord relied on a number of cases which had come before the Courts in the form of summary judgment decisions which had all been decided in favour of the Landlord those being Commerz Real Investmentgesellschaft MBH v TFS Stores Limited (2021) EWHC 863 (Ch), Bank of New York Mellon (International) Limited v Cine-UK Limited (2021) EWHC 103 (QB), London Trocadero (2015) LLP v Picturehouse Cinemas Limited (2021) EWHC 2591 (Ch) and a decision in the County Court at Liverpool which DTM Legal were again involved in Atmore Centres Limited v TFS Stores Limited (2021) (Unreported) District Judge Johnson.
The Landlord argued that there were three reasons why the Court should not stay the claim pending the Government’s proposed legislative change:
- The Scheme will not apply to the Tenant;
- It is the Tenant’s contention that there are no arrears;
- The Court should not, at an interim stage, take a step which might unfairly interfere with the parties’ contractual rights.
The Government introduced legislation during the pandemic which required closure of certain categories of establishment being :
The Health Protection (Coronavirus, Business Closure) (England) Regulations 2020
The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020
The Health Protection (Coronavirus, Restrictions) (No 2) (England) Regulations 2020
The Health Protection (Coronavirus, Local COVID-19 Alert Level) Regulations 2020
The Health Protection (Coronavirus, Restrictions) (All Tiers) (England) Regulations 2020
None of the legislation required the closure of office accommodation. The Tenant confirmed in its evidence that levels of occupancy had reduced but never to zero as would be consistent with a closure required by law.
The Government’s policy document is quite clear as to the situation in which it will apply and provided that it would ringfence debt accrued during the pandemic by “businesses affected by enforced closures”, “for tenants who have been forced to close as a result of COVID 19 business measures”, and “for commercial tenants who have been affected by COVID-19 business closures and those impacted by closures”.
The Landlord contends that the Tenant would not fall within the Government arbitration scheme as there was no Government enforced closure.
The Tenant also considers that there are no arrears which are capable of being ringfenced and the Tenant has confirmed its intention to defend the claim. The arbitration scheme is intended to apply to the situation where rent arrears are accepted by the tenant. Those arrears are then ringfenced and an arbitration will decide the extent to which those arrears must be paid. But there must be arrears. This was confirmed in the London Trocadero case.
Whilst the Court can take into account a potential future change in the law in determining how to exercise its case management functions, the court should not exercise its discretion in this case to order a stay. However the Government’s proposals ought to be sufficiently far advanced that it is clear that the legislation would be engaged. In this case the legislation has not been engaged and nothing was known as to how the arbitration is supposed to determine the liability for the arrears and how the process or the criteria will be adopted in determining the arbitration.
In relation to the pending appeal in Cine-UK there are two grounds of appeal:
- That the court erred in its construction of the rent cesser provision in the lease by limiting the word “damaged” as limited to physical damage;
- That during the period during which the premises would not lawfully be used, there was a partial failure of consideration.
The Tenant does not rely on the same feature which enables Cine-UK to contend in the Court of Appeal that the word “damaged” should be construed more widely than mere physical damage as the disruption caused by the COVID-19 pandemic was an “Insured Risk”. If the COVID-19 pandemic was not an insured risk, then it would not be open to Cine-UK to advance that argument and in this case the COVID-19 pandemic was not an insured risk.
The second ground of appeal is predicated on the argument that there were periods when, as a matter of law, the premises were required to cease trading and to close and that, therefore, there was a partial failure of consideration. However, in this case the premises were never closed by law.
Deputy District Judge Banks agreed with the Landlord’s submissions and was satisfied that the balance of prejudice falls in favour of dismissing the application for the stay. Application for permission to appeal was refused.
This is a challenging and complicated area of law currently and it is clear that each case has to be determined on its own facts.