Bank of New York Mellon (International) Limited v Sports Direct and Others
Following the earlier Fragrance Shop decision, the Court has quickly handed down a second summary judgment decision on the highly important question of whether commercial tenants are obliged to pay rent whilst their premises have been closed due to government COVID restrictions.
The judgment in Bank of New York Mellon v Sports Direct and others reaches the same result as the Fragrance Shop decision, namely that there is no justification in law for commercial tenants to withhold rent as a result of pandemic closures and loss of business.
The Bank of New York Mellon judgment is long (100 pages) and minutely detailed. It examines in an extremely thorough way a very wide range of arguments put forward by the tenants in the case (Cine-UK Ltd, Mecca Bingo Limited and Sports Direct). Every single potential general line of defence raised by the tenants (and there were many, in some cases deploying very creative arguments) were rejected.
Summary of points argued
Because the decision is so long, the arguments so wide ranging and the points taken so numerous, it is not possible in a short note to give anything but a brief overview of the main points decided:
- The Government's Code of Conduct for Landlords and Tenants (published June 2020) provides no legal basis for rent not to be paid. The Code is voluntary and makes clear that it does not affect the legal obligations of tenants
- "Loss of rent" insurance obtained by a landlord does not entitle tenants to withhold rent. A landlord has not "lost" rent (so as to be able to claim it from insurers) unless the tenant is lawfully able to withhold rent or otherwise cannot pay the rent due to eg, perhaps, insolvency
- A tenant's ability to lawfully not pay rent depends upon the precise terms of the "rent cesser" clause in the tenant's lease. Almost invariably, rent cesser clauses only allow tenants not to pay rent when the premises cannot be used because they have been physically damaged. Closure due to COVID is not physical damage
- Although tenants pay for the landlord's insurance premiums, that does not mean that tenants can effectively expect insurers to pay their rent; this is because the insurance is against the landlord's loss of rent, not the tenant's difficulties in paying the rent because of the pandemic
- The landlord may have taken out business interruption insurance, but that only applies to the landlord's business, not the tenant's. It has always been open for tenants to take out their own business interruption insurance, but tenants have not done so, and cannot complain at the result of that failure now
- There can be no implied term (of whatever nature) that would entitle the tenant not to pay rent. Although the Court accepted that it would potentially be fair and reasonable for the landlord to use the tenant's insurance payments to effect insurance that would benefit the tenant in this situation, it is neither obvious nor necessary for business efficacy that such a term be implied into leases. The express rent cesser clause sets out the circumstances under which rent shall not be payable (effectively when the premises are unusable by reason of physical damage) and thus there is no need for any further term to be implied alongside these express terms to make the lease "work"
- The law does not recognise the concept of temporary frustration of leases; a lease is either frustrated so it ends totally, or not. Thus tenants cannot claim that rent is not due for a period of "temporary frustration"
- Similarly, although lease obligations can be suspended if their performance becomes illegal by reason of Government intervention, paying rent has never been made illegal by the Government's restrictions so the obligation to pay rent is not temporarily suspended by reason of the restrictions
- In times of unprecedented uncertainty, it is the Court's job to apply the law in accordance with established principles and not to seek to reinterpret it to suit extraordinary times. It is for Parliament to change the law if it sees appropriate.
The Court has taken some four months to hand down this judgment, and its thoroughness in detail and coverage of a very wide range of points taken by the tenants reflects this time spent. The Court expressed itself very aware of the very wide ramifications of the judgment, hence no doubt its thoroughness.
Whilst the judgment will be welcomed by landlords, it will not be happily received by tenants who may have considered that the law would surely step in (alongside the current other moratoriums on landlord action and the government's Code of Conduct) to prevent some or all rent having to be paid during the pandemic period.
The parties are due to return to Court on 7 May 2021 when any applications for permission to appeal must be lodged. It remains to be seen whether any appeal will be attempted by the tenants.