Court of Appeal – relief for commercial landlords as COVID-19 rental arrears appeals dismissed

On 27 July, the Court of Appeal handed down judgment in two cases involving commercial rental arrears that had accrued in the COVID-19 pandemic during periods where non-essential businesses were forced to close. The two cases are Bank of New York Mellon (International) Ltd v Cine-UK Ltd and London Trocadero (2015) LLP v Picturehouse Cinemas Ltd, which were dealt with by the Court at the same time.

In both cases, the defendants were tenants of two commercial premises run as cinemas. Both tenants argued that the rent due under the leases should not be paid during the period where Government COVID-19 regulations forced non-essential businesses to close, making it unlawful to trade.

The tenants had already lost in the High Court, but took their cases to the Court of Appeal.

The Court of Appeal dismissed both appeals.

Overview

In the appeals, the tenants made the following arguments:

• that an implied term existed in their lease which suspended rent during periods in which cinemas could not lawfully be used for their permitted use due to COVID-19 restrictions (Cine-UK Limited);
   
• that the rent cesser provisions in the lease should be interpreted broadly and not limited to purely physical damage to the premises (Cine-UK Limited); and
   
• that because the leases had been entered into on the basis that the premises were to be used as a cinema, and that the COVID-19 restrictions had prevented this, that there had been a complete failure of consideration (Picturehouse Cinemas and others).

Decision

The Court of Appeal unanimously rejected the tenants’ arguments and agreed with the landlords that the Government’s restrictions did not relieve tenants from their obligation to pay rent. In particular, when looking at the implied term argument, the Court held that the term sought by the tenant was not necessary to give the lease business efficacy, nor did it pass the obviousness test (that the term to be implied is ‘so obvious that it goes without saying’). 

Further, the Court held that the rent cesser clause only applied where the premises were physically damaged or destroyed by an insured risk, something which did not occur in this case. Finally, the Court held that for the failure of basis and consideration argument to have succeeded, there would have had to have been a gap in the lease which did not cater for the circumstances of the case. It was found that the leases did not have any gaps in this regard and if the tenant had been released from obligations to pay rent during the periods of closure this would have resulted in an unlawful re-allocation of risk.

Comment

The outcome will be welcome news for landlords.

The Court has twice now unequivocally ruled that the arguments raised by the tenants do not merit a relief from rent arrears.

In order to reach commercial solutions in respect of COVID-19 commercial rent arrears, the Government introduced the Commercial Rent (Coronavirus) Act 2022 on 24 March 2022. This legislation contains provisions for a new arbitration scheme which aims to assist landlords and tenants in reaching a resolution in commercial rent arrears disputes brought on by the COVID-19 pandemic which we have discussed here: New Coronavirus Debt Legislation – Part 1 – What is Changing? : Clyde & Co (clydeco.com), New Coronavirus Debt Legislation – Part 2 - Arbitration process : Clyde & Co (clydeco.com), and here Coronavirus Rent Debt and the new Arbitration Scheme Part 3 – Mission Impossible? : Clyde & Co (clydeco.com).

However, landlords and tenants must act fast if they wish to utilise this scheme, given that they only have up until 23 September 2022 to refer matters to an arbitrator. We will be alive to any further developments in this regard, as the Government are yet to indicate whether the scheme will be extended.