High Court Rules In Favour Of Landlord In Covid-19 Rent Arrears Dispute

The High Court has recently ruled in favour of a Landlord (London Trocadero (2015) LLP) in a Covid-19 rent arrears dispute case concerning a commercial Tenant’s (Picturehouse Cinemas Ltd and others) liability to pay rent whilst the Covid-19 restrictions and regulations were in place. The High Court found that the Tenant was liable and subsequently required to pay the rent in full.

London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2021] EWHC 2591 (Ch)

Case summary

The dispute concerned two leases (one granted in 1994 and another in 2014) of a cinema in the Trocadero Centre in London (Leases). The Leases provided that the premises could only be used as a cinema, but this was not lawfully possible during the pandemic due to the Government’s Covid-19 restrictions.

During the height of the restrictions, the cinema was forced to close which meant that the Tenant could not operate. When the cinema was allowed to be open, it often didn’t due to very few customers being willing to visit it. As a result of this, the Tenant chose to stop paying the rent in June 2020. The Landlord brought legal proceedings against the Tenant seeking summary judgment for rent arrears and service charges totaling £2.9m.

The Tenant’s argument for not paying the rent centred on two key things, being:

1. That the terms of the Leases implied that the rent and service charge could be withheld if:
   1. The permitted use of the premises (as a cinema) became illegal; or
   2. If the number of customers visiting it fell beneath the level expected at the time the Leases were agreed; and
2. As the commercial premises could not be used for the purposes they were let (e.g. a cinema), there had been a failure of basis (also referred to as a failure of consideration). This failure, so the Tenant argued, meant that the Landlord was not entitled to receive rent for the periods when the cinema could not be open.

What did the High Court decide?

The High Court dismissed the Tenant’s implied lease term argument (point one above) on the basis that it was not obvious, neither was it essential to give the Leases’ business efficacy. This argument was also inconsistent with the express terms of the Leases, which clearly stated that rent payments could be suspended only in certain instances (e.g. insured damage to the property) and in other circumstances where the risk of not using the premises lay with the Tenant who could have purchased business interruption insurance.

With regards to the failure of the basis argument, this was also rejected by the High Court. The Court ruled that, under the terms of the Leases, the use of the property as a cinema wasn’t “fundamental to the basis” to which the Landlord and Tenant entered into the agreements. The use of the property as a cinema was just an expectation that the Landlord and Tenant agreed to, it was not something fundamental.

Comment

The High Court’s ruling, in this case, comes as a further blow to commercial tenants in respect of them withholding rent payments as a result of the pandemic and is consistent with the decisions in Commerz Real Investmentgesellschafft mbh v TFS Stores Ltd [2021] EWHC 863 (Ch) and Bank of New York Mellon (international) Ltd v Cine-UK Ltd [2021] EWHC 1013 (QB).

All of these rulings appear to reinforce the Government’s message that tenants are required to pay rent “where they can”. Moreover, the decisions (for the time being at least) and seem to reinforce the “commercial debt action” remedy available to Landlords that we previously discussed. That said, legislation is currently being proposed by the Government that would “ring-fence” Covid-19 related rent arrears and require disputing landlords and tenants to submit to “binding arbitration”. Whereas tenants could seek to use this as an argument to try and persuade the Courts to suspend or stay a live case until the legislation comes into force, this argument did fail in all of the aforementioned cases.

As the legislation progresses, however, we could see the approach of the Courts “soften” and they may be persuaded to take a different view.