The Court of Appeal recently ruled on two jointly heard cases that concerned whether a tenant can rely on a Covid-defence against a claim brought by a landlord for rent arrears accrued during the pandemic.
The cases of relevance are Bank of New York Mellon (International) Limited v Cine-UK Limited and London Trocadero (2015) LLP v Picturehouse Cinemas Limited and others [2022] EWCA Civ 1021.
Case details
In both of these cases, the Tenants operated cinemas but were temporarily unable to open as a result of the Government’s Covid-19 restrictions. They then failed to make sequential, quarterly rent payments and sought to use Covid as a defence. The Tenants’ arguments for not paying the rent centred on two key things, being:
- As the commercial premises could not be used for the purposes they were let (e.g. as cinemas), there had been a failure of basis (also referred to as a failure of consideration). This failure, so the Tenants argued, meant that the Landlords were not entitled to receive rent for the periods when the cinemas could not be open.
- That the implied terms of the Leases meant that rent and service charges could be withheld if:
- The permitted use of the premises (as cinemas) became illegal; or
- If the number of customers visiting it fell beneath the level expected at the time the Leases were agreed upon.
In the Bank of New York case (appeal only), the Tenant claimed that it wasn’t required to pay rent due to the rent cesser clause in the lease. This was linked to the Landlord’s duty to purchase insurance against non-payment of rent as a result of the pandemic, along with other risks.
The Landlords brought legal proceedings against the Tenants seeking summary judgment for rent arrears and service charges and were successful in the first instance (find out more here). However, the Courts granted the Tenants permission to appeal. The appeals were heard jointly by the Court of Appeal as the Tenants were members of the same corporate group.
What did the Court of Appeal decide?
As was the case with the High Court, the Court of Appeal dismissed the Tenant’s appeals in their entirety.
In respect of the failure of the basis argument, the Court of Appeal ruled that, as per the terms of the Leases, the use of the properties as cinemas wasn’t “fundamental to the basis” to which the Landlords and Tenants entered into the agreements. The use of the property as a cinema was just an expectation that the Landlord and Tenant agreed to, it wasn’t something fundamental.
The Tenants’ implied lease term argument failed both the “business efficacy” and “obviousness” test. The Court of Appeal ruled that the requirement for the Tenants to pay the rent, despite the premises not being able to be used for their permitted use, “did not lead to the conclusion that the leases lack commercial or practical coherence.”
In respect of the rent cesser clause (in the Bank of New York case), this is only related to physical damage or destruction caused as a result of an insured risk. The Landlord’s insurance wouldn’t cover a loss of rent that the Tenant did not have to pay. Instead, only where the Tenant would be legally required not to pay rent.
Comment
The Court of Appeal’s ruling in these cases 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 previous decisions.
Further, for tenants who still haven’t come to an agreement with their landlord’s concerning rent arrears, or began the arbitration process under the Commercial Rents (Coronavirus) Act 2022, this ruling is a warning for them to consider their options cautiously. To those considering the arbitration route, time is now of the essence since the scheme is due to come to an end next month.
How can Nelsons help?
For more information concerning the subjects discussed in this article, please contact a member of our expert Dispute Resolution team in Derby, Leicester, or Nottingham on 0800 024 1976 or contact us via our online form.
Contact us