JOANNE WICKS QC OF WILBERFORCE CHAMBERS LOOKS AT HOW A LEASE’S INSURANCE PROVISIONS AND ITS RENT CESSER PROVISIONS ARE LIKELY TO APPLY DURING THE LOCKDOWN
Here’s my prediction for the next wave of property litigation: cases around insurance and rent suspension. The insurance industry is keen to tell the world that almost no-one has cover for the business losses caused by Covid-19 and the resulting shutdown of business through the Health Protection (Coronavirus, Restrictions)(England) Regulations 2020. But is that true? And if a landlord has insurance cover, will its tenant be able to get a rent holiday? In a time of acute cashflow difficulties for many businesses, that may be the difference between survival and insolvency.
Most well-drafted commercial leases contain a detailed web of provisions governing insurance and the consequence of damage by insured risks. The landlord covenants to insure the premises and the building against certain defined risks. The tenant covenants to pay its fair share of the premiums, via an insurance rent. If an insured risk materialises, the landlord must pay out the insurance monies in rebuilding the premises. There are provisions which govern what happens if the tenant has caused the insured event to occur or the insurance to be avoided. Sometimes there are break clauses allowing one or both parties to terminate the lease if the damage is significant or longlasting. And importantly, there is the rent cesser: a provision which relieves the tenant of the obligation to pay rent until the premises are repaired or a certain time has elapsed. In theory, the insurance policy and the rent cesser provisions work seamlessly together: if the premises burn down through no fault of the tenant, the tenant is not required to pay rent whilst the premises are rebuilt; the landlord claims on the insurance both for the cost of the rebuilding work and for the loss of rent. Simple.
So where does that leave business tenants affected by Covid-19? The first question will be whether there is a relevant insured risk, within the definition in the lease. Many definitions have a long list of risks, such as fire, flood, storm, etc and then a general sweep up ‘…and such other risks as the Landlord may reasonably consider necessary to insure against’. A landlord might try an argument that the definition is to be read according to the ejusdem generis rule, so that ‘other’ risks means only the risks of physical damage similar to those already listed, and cannot extend to business interruption by a pandemic. But if the landlord has in fact taken out business interruption cover and has charged the tenant with the cost of that cover through the insurance rent whipping out the latin tag looks decidedly opportunistic. The landlord has treated the risk of a pandemic as an insured risk for the purpose of charging the tenant insurance rent, so why should it be entitled to take a different approach now the risk has materialised?
And despite what insurers may say, some landlords will have taken out policies which cover the risks of Covid-19. Some policies have cover relating to notifiable or infectious diseases; others loss of attraction of the demised premises or denial of access through government action. All of these need careful scrutiny to see if the insurer must pay out in the circumstances which have in fact occurred.
“The lease has to be read as a whole, and the concept of ‘damage’ must be considered in light of the lease’s definition of insured risk”
The next question is whether the rent cesser provision in the lease applies. Many leases will refer to ‘damage or destruction of the premises by an Insured Risk’: can the shutting of the premises by law, or the effect of a notifiable disease, constitute ‘damage or destruction’? The lease has to be read as a whole, and the concept of ‘damage’ must be considered in light of the lease’s definition of insured risk. If the definition extends beyond physical damage to include business interruption, then surely the scheme of the lease only works if ‘damage’ is given a wide meaning, to encompass loss arising from business interruption.
When exactly does the rent cesser kick in, and how long does it last? That question is made particularly interesting by the fact that the Regulations came into force on 26 March 2020: the day after the March quarter day. Can the tenant recover part of the March quarter’s rent, if it paid it, or does Marks & Spencer Plc v BNP Paribas tell us otherwise? Can it refuse to pay, if it has not yet paid? And what is to happen if the Regulations have been lifted by the time of the June quarter’s rent? All these questions are yet to be answered by the courts.
So, what should landlords and tenants be doing, right now? Tenants should be checking the terms of their leases and asking for a copy of the landlord’s insurance policy. They must surely have a right to see that if they cannot otherwise tell if they are obliged to pay rent for their premises. And landlords need to get their skates on, sharpish: they are likely to have notification obligations under their insurance policies. If they concentrate on pursuing their tenants for unpaid rent and do not notify in time, they risk being in the worst of all possible worlds: finding that the rent has indeed been suspended because the pandemic is an insured risk under the lease, but that they have prejudiced their insurance cover through failure to comply with the policy provisions.