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Rental, covid-19 and impossibility to pay rent

10 November 2022 Donald Dinnie and Daniel Breier, Norton Rose Fulbright
Donald Dinnie, Norton Rose Fulbright

Donald Dinnie, Norton Rose Fulbright

In this judgment the Supreme Court of Appeal decided that the lessor was entitled to evict its tenant as a result of non-payment of rental because the tenant’s pleas that it could not pay rent because of the Covid-19 pandemic could not excuse non-payment from September 2020.

The court said that it was trite that where the performance of an obligation by a party to an agreement becomes impossible after the conclusion of the agreement, through no fault of its own, that party is discharged from liability if it was prevented from performing its obligations by vis major (an unforeseeable, unpreventable event creating impossibility to perform). The lease agreement contained no specific vis major provision. 

The tenant argued that the Covid-19 regulations impaired its ability to fully trade and exploit the commercial potential of the premises and so constituted vis major which discharged it from the liability to pay rent during disaster regulation alert levels 4 and 5 and entitling it to partial payment of rental during alert levels 1 to 3. 

The appeal court said that on the facts it was unnecessary to decide whether the restrictive regulations applicable during the period 26 March 2020 to 20 September 2020, which prevented or restricted the operation of the tenant’s business as a guesthouse, constituted a supervening impossibility of performance that discharged the tenant from liability to pay the full amount of rental.

The court said that the period after 20 September 2020 was on a different footing because there was no government-imposed bar to trading at that stage.

So even if the court accepted in the tenant’s favour that the Covid-19 regulations which prevented or restricted trade were behind the tenant’s default and the non-payment of rental, there was no justification for that default beyond 20 September 2020 despite their alleged diminished commercial ability that may have resulted from the Covid-19 pandemic.  The appeal court said that the doctrine of impossibility to performance could not conceivably have been triggered beyond 20 September 2020.

The lease agreement entitled the lessor to “forthwith cancel this lease and resume possession of the property”, in the event of the failure to timeously pay the rental.

It was clear on the facts that regardless of any consideration that could be made for remission of rental from April to September 2020 (accepting that there was an impossibility of performance due to restrictions on trade), the tenant failed to pay rent when due on 1 October, November and December thereby breaching the payment clause in the lease agreement and entitling the lessor to cancel the lease.

The parties were agreed that the amount of rent to be remitted, if remission of rental was applicable, was not promptly ascertainable given how the rental was structured.  The only option would be for a court to determine the extent of the remission.  In that case, and having regard to earlier case authority, where remission of any rental is applicable and not readily ascertainable a court must be approached for the computation of the remission.  The tenant may not simply deduct what it conceives to be an amount that represents the remission.

The court rejected an argument that the enforcement of the cancellation clause in these circumstances would be against public policy.  The court had regard to the fact that the lease was concluded for commercial purposes and the lessor had corresponding financing repayment obligations that were imperilled by the tenant’s failure to pay rent.  The court held that the lessor was entitled to an order of eviction.

The question of ascertainment of the amount of remission of rental, if any and its bearing on the amount of the rent claimed (but not the eviction order) were referred back to the high court to be determined.

What this judgment does not do is determine whether or not the Covid-19 regulations operating up to mid-September 2020 constitute applicable vis major entitling the tenant to remission of rental.  That issue was referred back to the high court for determination. The court was satisfied that the Covid-19 regulations post 20 September 2020 when there was no government bar to trading did not entitle the tenant to remission of rental.

This judgment will have implications for insurance business interruption claims.

First published by: Financial Institutions Legal Snapshot

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