Covid-19 & rent arrears

The case concerned two leases of cinema premises at the Trocadero Centre in London and a summary judgment application brought by the landlord in respect of approximately £2.9m in unpaid rent.

The tenant argued that it was not liable for rent and service charges in respect of periods during which the premises could not be used as a cinema and that either (a) a term should be implied into the lease to this effect, or (b) there was a failure of basis (also known as a failure of consideration) in relation to the leases.

The parties are also in dispute about other sums due under the lease and there was an issue in relation to set-off.

The tenant’s evidence was that during the period 23 March 2020 to 16 May 2021 the premises were open for 71 days and takings were £247,000. This compared to takings of £8.92m for the period between 23 March 2018 and 16 May 2019.

The court rejected the tenant’s arguments in respect of the covid related rent arrears and granted the landlord summary judgment.

The court’s decision in more detail

Implied terms

There are certain principles that must be met in order for the court to imply a term into the contract and these include that a term will not be implied unless, on an objective assessment of the terms of the contract, it is necessary to give business efficacy to the contract and/or the implied term is so obvious that it goes without saying.

The tenant put forward two implied terms:

(a) That if the Permitted Use of the premises by [the Tenant] under the leases were to become illegal, then the obligation to pay rent and service charges otherwise due thereunder would be suspended and cease to be payable for that period;

(b) That the sums due under the leases would only be payable in respect of periods during which the premises could be used for its intended purpose, as a cinema with attendance at a level commensurate with that which the parties would have anticipated at the time that the 1994 Lease and the 2014 Lease were entered into.

However, the court identified the issue at stake as one of commercial risk and found that the ‘requirement for the Tenant to pay rent even though the premises could not be used for the intended purpose as a result of unforeseen, extraneous events does not deprive the leases of business efficacy or mean that they lack commercial or practical coherence’. The court acknowledged that without the implied terms, the risk was shouldered by the tenant but found there was ‘no good commercial reason why the loss should necessarily be borne by the Landlord’ and noted that it was a matter for negotiation between the parties as to where the risk should lie. In line with a previous decision in relation to rent arrears attributable to the pandemic it was stated that it would have been open to the tenant to take out business interruption insurance to guard against such risks.

In relation to the obviousness test, the fact the landlord expressly gave no warranty that the property could be lawfully used as a cinema and that express provision had been made in the lease as to circumstances where the rent would be suspended also leant against it being obvious that a further term should be implied.

The judge therefore concluded that the tenant’s defence to the claim for unpaid rent based on an implied term had no realistic prospect of success.

A failure of basis

The court also rejected an argument that there had been a failure of basis. The concept may be described as ‘the failure of a state of affairs on which the agreement was premised’. Taking into account the terms of the leases, the court found the use of the premises as a cinema was not "fundamental to the basis" on which the parties entered into the leases, rather it was an expectation which motivated them to enter into the lease. The court concluded that in this case the drafting in the lease allocated the risk that the premises could not lawfully be used as a cinema to the tenant and that the suggested failure of basis argument ‘would both interfere with the agreed allocation of risk between the parties as well as being inconsistent with the terms of the leases.’

It is also worth highlighting that a failure of basis is usually relevant to claims based on unjust enrichment which is a restitutionary remedy and which the tenants were not in this case pursuing (the tenants arguing that if they could show a failure if basis it would make no commercial sense to require them to make the payment and then commence a claim for a return of the payment in unjust enrichment). However, the court noted, obiter, that a failure of basis should not provide a standalone defence to a contractual claim where the contract remains in existence. The court was concerned that to go down such a route ‘would be tantamount to extending the doctrine of frustration so as to allow obligations under a contract to be suspended as a result of what might be termed temporary or partial frustration.’

Set-off

The tenants were pursuing a counterclaim for £621,000 in relation to an insurance dispute. The lease required the rent to be paid ‘’without any deduction whatsoever’ and the court found this wording did not prevent the tenant exercising a right of set-off.

However, one of the leases of the property was an ‘old’ lease and so the original tenant remained liable and was one of the defendants in the case. The court found the original tenant did not benefit from the right of set-off as the landlord’s claim against the original tenant was a separate claim. There was also a guarantor who had a liability under both the old lease and also a later ‘new’ lease and the court found that the guarantor’s liability under the later ‘new’ lease may be reduced by the tenant’s right of set-off.

Overall

The court concluded that the tenants had no realistic prospect of defending the claims and granted summary judgment in respect of the claim for the unpaid rent, subject to the point on set off. It concluded that there was no other compelling reason for the matter to go to trial. The court considered the government’s proposed introduction of a binding arbitration process in respect of rent due in the circumstances that were the subject of the application but did not consider that this gave grounds for barring the landlord’s right of recovery now.

Comment

Although landlords will be encouraged by this decision, the Cineworld group is also involved in another piece of litigation with a different landlord in relation to unpaid rent. In that case the landlords were also successful in their summary judgment application. However, an application for permission to appeal directly to the Court of Appeal has been lodged in that matter, with the judge noting in this case that should there be any appeal from his decision it would be more efficient for the two cases to be heard together.

The fact the promised arbitration process has no current impact on the landlord’s ability to seek a judgment for unpaid rent through the court process leaves a question mark as to what value such process will have for those tenants who are now being pursued for the full amount of accrued arrears prior to the arbitration process coming into effect.