The judgment in the joint appeal of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others alongside Bank of New York Mellon (International) Ltd v Cine-UK Ltd and other appeals was handed down on 27 July 2022.
The tenants, Cine-UK and Cineworld argued that the Covid-19 legislation which required various premises to close (including cinemas) meant that the premises were “unusable” and therefore, under the provisions of their leases, they were not required to pay rent during lockdown.
At the High Court in 2021, the tenants lost, but were given permission to appeal.
The Court of Appeal has unanimously dismissed both appeals in a decision that will be extremely welcome to commercial landlords who are attempting to recover rent arrears in the aftermath of the pandemic.
The High Court decisions
Rent cessation argument
In Bank of New York Mellon, the tenants tried to argue that the words “damage or destruction” contained in the rent cessation clause extended to non-physical damage to the premises. The landlord had insurance which covered losses incurred as a result of the pandemic, including loss of rent. It was not disputed that such loss was an “Insured Risk” under the lease and the tenants were required to pay insurance rent.
The tenants argued that because they were obliged to pay an insurance rent, the insurance ought to cover their rental liability on the basis that the loss stemmed from an “Insured Risk”. The Master did not agree with that argument because the provision would only operate if the rent cessation clause in the leases applied, so that the tenants’ contractual liability to pay rent was suspended. Because there was no physical damage or destruction to the premises, the rent cessation clause was not engaged.
Failure of basis argument
Some tenants tried to argue there was a “failure of basis” – a temporary suspension or frustration of the leases during lockdown when the premises could not open, meaning the premises were not capable of lawful use and therefore any payment of rent would amount to an unjust enrichment to the landlord. This argument was rejected on the basis there was no weight behind the idea of a temporary frustration.
The tenant attempted to argue this point in Trocadero, saying that there was a “failure of basis” with regard to the times when the premises could be used, and therefore the leases could be “severable” by way of time apportionment. This argument was rejected by the Court, the judge reasoning that the use of the premises as a cinema was not fundamental to the reasons why the parties entered into the leases.
Implied terms argument
The judge also rejected arguments that it was an implied term of the lease that the obligation to pay rent would be waived where the tenant was unable to lawfully operate the premises as a cinema stating that the lease terms were clear and certain both commercially and practically and therefore it would not be appropriate to imply terms.
Basis of appeals
Both tenants attempted to argue that because, during the lockdowns, it was unlawful (by reference to the Covid-19 legislation) to operate a cinema from the premises, their obligation to pay rent for those periods ought to be waived because:
- The premises had to be capable of lawful use, and the effect of the Covid-19 legislation was to render unlawful operating a cinema from the premises. The tenants argued that this would lead to a claim for unjust enrichment for any rent paid in respect of the “illegal” periods for operating. They sought to rely on a “set-off” defence, rather than a “failure of basis” (which they acknowledged could not work as a substantive defence). On appeal (notwithstanding the first instance decision in Trocadero) the tenant in Bank of New York Mellon raised a failure of basis argument.
- There was an implied term that the tenants ought to be relieved of their obligation to pay rent if they were not able to lawfully use the premises as a cinema.
- In Bank of New York Mellon the tenant also tried to argue that its obligation to pay rent was waived based on a true construction of the rent cessation clause in the lease.
The Court of Appeal’s decision
The rent cessation argument raised in Bank of New York Mellon was very quickly rejected by the Court, agreeing with the High Court that it only operated where there was physical damage or destruction.
Equally, the Court did not agree with the “implied term” argument raised in both cases, as there was nothing obvious which could clearly be implied into the leases, and the implied terms which the tenants were arguing for did not fit with the leases themselves. The Court concluded that the tenants’ argument was an attempt to re-work the risk taken on by both parties in entering into the leases.
The Court also rejected the tenant’s attempt to argue a “failure of basis” in Bank of New York Mellon on appeal, again because it was an attempt to change the risks taken on by both parties and would go against the terms of the contract entered into.
The Court of Appeal held in favour of the landlords, primarily on the basis that the tenants’ arguments did not reflect the contract that was agreed between the parties. Additionally, the rent cessation clause would only apply where there was physical damage/destruction to the premises by an insured risk, and there was nothing to justify a claim in unjust enrichment.
The decision will be a welcome relief to commercial landlords who are still trying to recover arrears accrued by their tenants during the pandemic.
For tenants who have not referred themselves to arbitration under the Commercial Rent (Coronavirus) Act 2022 or reached an agreement with their landlord, action should be taken quickly to consider the options available to them, or risk enforcement action from their landlord when the moratorium in relation to protected rent debt is lifted on 23 September 2022.