UK COVID-19 – The FCA Business Interruption Test Case ruling – the end of the ‘Covid clause’ in leases?

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This week the High Court has delivered its eagerly anticipated ruling in the FCA Business Interruption Test Case. The case was brought by the Financial Conduct Authority on behalf of business interruption policyholders, with the aim of determining issues of principle on coverage and causation under a series of sample policy wordings.

Whilst of broad significance for all those whose businesses have been affected or interrupted by COVID-19, the judgment does not specifically address the question which many owners of real estate have been asking in the context of their leases:

  • Can landlords make any recovery under ‘loss of rent’ insurance policies, where tenants have failed to pay rent but this is not linked to physical damage/destruction of their premises?

The judgment does, however, have the potential to influence some of the negotiations which have been occurring between landlords and tenants in recent months, particularly around requests for so-called ‘Covid clauses’. With the spectre of further lockdowns (whether local or national) continuing to loom, such clauses are still being sought by tenants keen to secure either suspensions or reductions in rent in the event of an inability to trade or work from their premises. The negotiation of these clauses is fraught with difficulty: Should they cover only COVID-19 or also any future pandemic? Should they be triggered by government-issued guidance or only by legislation? The test case ruling doesn’t help to answer those questions directly, but in providing more certainty around the scope for successful insurance claims – and therefore the risk profile for each party – it does potentially alter the landscape going forward.

For occupiers of real estate, the key question has been:

  • Can tenants make any recovery under business interruption policies, to cover rent which they have had to keep paying even while they have been unable to occupy or trade from their premises due to lockdown restrictions?

In this regard, the judgement is complex, addressing cover for COVID-19 related claims under 21 different sample policy wordings, and does not lend itself to easy conclusions. Our insurance team have reviewed the judgment in detail and their headline analysis can be read here.  Although there were ‘wins’ for each side on the case, it is clear that at least some business interruption policies -depending on the specific wording – would be construed widely enough:

  • To cover not only the effects of local occurrences of notifiable diseases but also a wider ‘national’ peril
  • To be triggered not only where government action has the force of law but also, in some cases, by government ‘advice’
  • To pay out in respect of ‘hindrance of use’ even where complete prevention of access does not occur.

The critical upshot is that the outcome in each case turns on the effect of specific words and phrases within the various clauses considered by the court. Also (for certain clauses) it turns on the nature of the business conducted by the policyholder and how it was affected by COVID-19 and the various government measures. But in summary, it is fair to say that there is at least a gateway to insurance cover under a broad range of wordings. Whether landlords and tenants will have the capacity and inclination to investigate their particular policies in detail when negotiating Covid clauses, and whether the balance of negotiating strength will tilt in favour of landlords as a result of this ruling, are matters which remain to be seen.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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