Business Interruption Insurance ruling: what does it mean for landlords and tenants?

Following Jane Hobbs' detailed review of the ruling by the Supreme Court in the so-called “business interruption test case” of FCA v Arch Insurance (UK) Ltd and others [2021] UKSC 1, we consider what the decision means for landlords and tenants. 

The case focussed on the interpretation of business interruption insurance policies usually held by small and medium-sized businesses, but landlords’ loss of rent policies often contain similar language. These are policies which cover losses suffered by a landlord for so-called “no-damage” reasons, meaning losses which arise from events where there is no physical damage to the property itself. These insurance provisions may contain disease clauses and prevention of access and public authority wording like those referred to in Jane’s briefing note. Therefore, the ruling is likely to help landlords claim for loss of rent suffered as a result of measures put in place to slow the spread of the Covid-19 pandemic.

The court did not agree with the lower court’s interpretation of all legal issues, but the court did overwhelmingly find in favour of the policyholders. The judgment, therefore, widens the circumstances in which landlords and tenants may recover their losses.

Considerations for landlords and tenants

Under most commercial leases, the landlord will be the policyholder under the relevant business interruption policy. Therefore, the landlord will have a responsibility to advance a claim. However, as the party running a business from the property, the tenant may have to provide evidence of how the Covid-19 outbreak has interrupted its business in support of the landlord’s claim. It is also possible that a tenant has business interruption cover which will allow it to recover losses and, in turn, enable it to make payment of outstanding rent, thereby reducing the landlord’s claim. This means that cooperation may be required between landlords and tenants and their respective insurers.

The ruling gives some landlords an opportunity to mitigate their losses and may encourage tenants to defend, or delay, a landlord’s claim. However, where there is a contractual obligation to pay rent and the landlord makes a successful claim on its insurance, the insurer may be subrogated to the landlord’s contractual claim for the payment of rent. This raises the question in some cases as to whether the existence of a policy under which the landlord can recover loss of rent will allow the tenant to delay or defend claims for arrears. However, tenants should still ask for copies of their landlord’s insurance policy to check the possibility of making a claim.

Landlords are well-advised to consider the specific wording of their insurance policies carefully and, if necessary, seek advice as to whether the policy now covers a loss of rent claim. If so, then they will need to submit a quantified claim, prepared and supported by evidence in accordance with the policy terms. There will be several considerations in relation to such claims.

Will rent reductions impact on recovery under the insurance?

Where landlords are seeking to recover losses under the relevant policy wording, a question arises as to whether any temporary rent reductions or other concessions agreed in respect of arrears will impact on recovery under the insurance.

In this respect, it is unlikely that insurers will accept that any concession made following the Government's code of practice for commercial property relationships issued in June 2020 constitutes compliance with an instruction from a relevant authority. 

In addition, in many cases, buildings remained open and available to tenants and concessions were negotiated on a voluntary basis i.e. the landlord choose to receive a lower rent. Therefore, there may be claims by insurers that any balance which was conceded is not recoverable. 

As other remedies usually available to landlords to enable them to mitigate their losses have been temporarily removed by Covid legislation, landlords may still argue that alternative arrangements were necessary to minimise loss of rent in accordance with an obligation to mitigate losses. They should therefore be covered on that basis. However, the position will be different in relation to turnover rents which have reduced significantly and have led to involuntary losses on the part of landlords; these losses are likely to be the subject of future claims.

What does the court ruling mean for landlords?

The Supreme Court ruling means that if landlords (and tenants) have the relevant insurance cover then they are better placed to bring a claim. Undoubtedly, there will be an increase in the number of claims in respect of Covid-19 losses. There are issues that remain to be resolved but insurers can no longer delay in dealing with claims on the basis of the ongoing test case and will now have to process the claims in order to avoid further litigation.