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Saleem Fazal

Saleem Fazal

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Author
Saleem Fazal

Saleem Fazal

Partner

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10 October 2022

RED Alert - October 2022 – 2 of 5 Insights

Landlords survive Coronavirus rent reduction: can tenants avoid paying rent due to a Coronavirus imposed closure?

  • Bank of New York Mellon (International) Limited v Cine-UK Limited
  • London Trocadero (2015) LLP v Picturehouse Cinemas Limited & Others [2022] EWCA Civ 1021

Summary

Following the High Court decision, these cases were heard by the Court of Appeal together as they considered the same point of whether the tenants were able to avoid paying rent for periods when they were forced to close due to the various Coronavirus Regulations (collectively the Regulations) passed by the UK government during the pandemic.

Both tenants failed in all their arguments and were found liable to their landlords in the full amount.

The facts

Both tenants were cinema operators pursuant to leases granted for 35 years.  Various Regulations affected their operation between 22 March 2020 and 18 July 2021 during which period the cinemas were closed down or permitted to open on a limited basis.   Even when they were permitted to open, both tenants chose not to do so for some of the periods given it was not commercially viable to do so.

Cine-UK's landlord sought payment of the rents due on 25 March, 24 June and 29 September 2020.   The case was first heard in November/December 2020 and judgement was entered against Cine-UK in April 2021 for the full amount due.  This was duly paid in July 2021 but Cine-UK appealed.

Cine-UK's landlord had insured the premises at the tenant's cost for certain insured risks which included loss of rent.

Picturehouse's landlord sought payment of the rents due in June, September & December 2020 and also March 2021.  Picturehouse claimed the return of rent they had paid in March 2020.  Once again, the Court found against Picturehouse and ordered full payment of the all the outstanding rent.

 

The arguments

 

The following tenants' arguments were considered by the Court of Appeal:

 

Rent cesser

The Cine-UK lease contained the usual clause concerning the suspension of rent in certain circumstances:

“In case the Property …….shall at any time during the Term be destroyed or damaged by any of the Insured Risks so as to render the Property unfit for occupation or …….. then the Basic Rent or a fair proportion thereof and Service Charge ………….. shall from and after the date of such damage be suspended and cease to be payable until the Property shall have been made fit for occupation……."

PROVIDED THAT If it is not possible for any reason for the Landlord to rebuild or reinstate the Property within a period of three years from the date of damage or destruction being caused by any of the Insured Risks……….

The landlord argued that this only applied to cases where there was physical damage and that explains the Proviso referring to the Landllord rebuilding or reinstating the Property.   The tenant on the other hand relied on the definition of Insured Risks as including strikes and labour disturbances which do not result in physical damage.

Implied terms

Cine-UK argued that there should be a term implied into the lease that where the landlord has insured at the tenant's cost, against loss of rent arising out of an insured risk involving non-physical damage which meant the Property was unfit for occupation, a suspension of rent would operate if the insured risk occurred.

Picturehouse argued that there should be terms implied 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;
  • 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 [lease] was entered into.

Failure of basis of consideration

Cine-UK and Picturehouse argued that the effect of it being unable to operate resulted in a partial failure of consideration relieving it of its liability to pay rent.

The decision

The Court of Appeal dismissed all of the tenant's arguments and found for the landlord. On the rent cesser clause, the Court found that the Property had to suffer physical damage. It was not possible to say that the premises were unfit for occupation or use where they are perfectly fit physically for occupation or use, but the Coronavirus restrictions have made it unlawful for Cine-UK to use them.

Furthermore, contrary to the tenant's argument, a "strike or labour disturbance" could in fact result in physical damage.  These findings were also unaffected by the landlord's insurance for loss of rent which covered the interruption or interference with the landlord's business and not the tenant's.

Turning to the implied terms, the business efficacy test would only be satisfied if without the term, the contract would lack commercial or practical coherence.  The Court did not consider that to be the case as the lease worked perfectly without them.

In addition, the obviousness test would only be satisfied if the term is precisely expressed and must be so obvious to go without saying.  The Court was not satisfied that the landlords in each case would have expected such terms to be included and so they did not pass this test either.

Lastly, there had been no failure of consideration.  The leases were granted in each case for 35 years and the Regulations covered a very short period within that time and in fact had many years left to run.


Our comments

It is perhaps unsurprising that the Court of Appeal refused to stretch the meaning of the leases to cover the effects of the pandemic which really had not been in the parties' contemplation when the leases were granted.

The pandemic has resulted in new leases containing provisions which aim to deal with future pandemics.  These may be landlord or tenant friendly depending on the strength of each party's bargaining position.

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