COVID-19 and Commercial Tenancies – the Court's View on Non-Payment of Rent
A decision of the High Court brings into sharp focus the difficulties experienced by both Landlords and Tenants of commercial properties during the current pandemic and the approach adopted by the courts in such circumstances.

The core issue in Oyster Shuckers Limited t/a Klaw v Architecture Manufacture Support (EU) Limited [2020] IEHC 527 centred around the validity of a lease of a premises operated as a restaurant by the plaintiff (Tenant), and an ability to pay rent. The Tenant stopped paying rent after March 2020 prompting the first named defendant (Landlord) to threaten that it would take possession of the premises and demanding that the Tenant deliver up vacant possession.

The Tenant applied to the High Court (Court) for injunctive relief preventing the Landlord from taking possession. The Landlord's position was that the only valid lease between the parties had expired, and the Tenant was overholding. The Tenant argued that it had the benefit of an alleged lease which had been agreed in November 2018 (Disputed Lease).

In June 2020, the Tenant secured an interim injunction preventing the Landlord from taking immediate possession, largely on foot of the inadvertent moratorium created by the Emergency Measures in the Public Interest (COVID-19) Act 2020 “on all proposed evictions in all tenancies in the State”  during the operation of that Act, which we previously reported on here

The interlocutory injunction application came before the Court in October 2020.   

Injunctive relief and breach of covenant

Significantly in this case, the Tenant had made no rent payments since March 2020 allegedly due to the impact of COVID-19 on its business. Even if it secured the injunctive relief sought, the evidence suggested that the restaurant would not re-open until Spring 2021.   

Interestingly, the Landlord submitted that rather than seek an injunction preventing the Landlord from recovering possession; where the Tenant maintained that a valid lease existed between the parties, the appropriate remedy was to seek relief against forfeiture. The Landlord claimed that the Tenant "studiously avoided" seeking this relief  because of the requirement of a party invoking such relief to pay the arrears under the lease. 

The Court noted the importance of the issue raised by the Landlord, as to whether is it possible to grant injunctive relief where the Tenant is in breach of its fundamental obligation to pay rent. However, the Court held there was no authority for the proposition that a tenant in default of rent can never, in any circumstances, get an injunction restraining a landlord from exercising its contractual rights to regain possession.

Non Payment of Rent 

The Tenant sought to rely on the rent suspension provisions of the Disputed Lease, which essentially applied where part of the premises was unfit for occupation or use.  Alternatively, it was argued that the doctrine of frustration would temporarily excuse performance of a particular contractual obligation in certain circumstances, without frustrating or discharging the contract as a whole.

The Court found that the rent suspension argument was not applicable to a situation where the plaintiff had ceased to trade because of a pandemic. Likewise, it was not accepted that the rental obligation, but not the lease itself, could be regarded as “frustrated”. The Court agreed with the rejection of the concept of “partial frustration” by Kelly J (as he then was) in Ringsend Property Limited v. Donatex Limited [2009] IEHC 568.

Balance of Convenience

The Landlord queried the efficacy of the plaintiff’s undertaking as to damages. It was asserted that the only means by which the Tenant could meet its undertaking was by generating income from its restaurant business. The evidence to the Court of a Spring 2021 re-opening suggested that the plaintiff’s financial prospects were “bleak”.

In determining whether to grant the injunction the Court applied the framework proposed in the recent Supreme Court judgment in Merck Sharp & Dohme v Clonmel Healthcare [2019] IESC 65 (Merck) (which we have previously reported on here and here). In addition to considering whether there is a fair question to be tried, the Merck principles require an examination of the balance of convenience, under which the adequacy of damages falls for consideration.

Applying those principles, the High Court was satisfied that:

  • There was a fair question to be tried as to whether the Disputed Lease was valid, binding and effective;
  • Rent arrears did not automatically preclude a plaintiff from obtaining the type of injunction sought;
  • Failure to discharge rent in the past and an admitted inability to discharge rent in the future were matters which weighed heavily when assessing the balance of convenience;
  • The Tenant had not persuaded the court that it would suffer irreparable harm if an injunction was refused, or that an award of damages would not fully compensate it;
  • There was no substance to the undertaking as to damages offered by the plaintiff who could not currently pay the full rent, was unlikely to resume trading until 2021 and had not produced any other evidence of assets to satisfy this undertaking.

Conclusion

Although the Court was sympathetic to the Tenant's plight, the balance of convenience lay against granting the injunction. The Court regarded the application as in effect asking the Landlord to subsidise or underwrite the future trading prospects of the Tenant, during which time the Landlord would be deprived of the use of its premises. 

During this pandemic, the courts have highlighted the value of communication and negotiations between Landlords and Tenants. Injunctive relief is available, but parties should be mindful that the court will take into account the entire circumstances in determining where the balance of convenience lies.

 

 

Key Contacts

Gráinne Varian Senior Associate

Richard Breen Partner

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