Court of Appeal: tenants’ commercial rent arrears appeals dismissed

The Court of Appeal has dismissed an appeal by commercial tenants against the High Court’s summary judgment rulings ordering them to pay rent arrears notwithstanding the COVID-19 pandemic.

Claims were issued by Bank of New York Mellon (International) Ltd and London Trocadero (2015) LLP against their respective tenants, Cine-UK Limited and Picturehouse Cinemas Ltd and others, during the height of the pandemic in relation to the tenants’ failures to pay arrears due under leases of the premises that they occupied.

The tenants’ defences included arguments on rent suspension, implied terms and failure of consideration (Cine-UK Limited) and implied terms and a failure of basis (Picturehouse Cinemas Ltd and others).

Despite the fact that the tenants were unable to use the premises for certain periods during the pandemic, the High Court issued summary judgment against them in 2021 and ordered them to pay the arrears in full.

However, the tenants appealed the High Court’s judgments on the following grounds:

1. Rent cesser provision - the tenant argued that this should not be limited to physical damage.
2. Implied term – the court was wrong to reject the argument that a term should be implied into the lease to the effect that the rent due under the lease should be suspended for the period during which the premises could not be occupied.
3. Failure of consideration/basis – the court was wrong to conclude that there had been no partial failure of consideration which would mean no rent was due.

The appeals were dismissed in full.

Key Points

The Court of Appeal held as follows:

1. Rent cesser:
   • The premises had not been damaged by the Coronavirus pandemic. Based on the construction of the Cine-UK lease and the insurance policy in question, damage meant physical damage or destruction. The court held that the words in the lease cannot have been intended to include financial damage.
   • The loss of rent was not caused by the pandemic. It was caused by the tenant’s decision not to pay the rent. The loss of rent would have been caused by the pandemic if, due to a different rent cesser clause or different provision in the lease, the tenant was not obliged to pay rent. That was not the case here.
2. Implied terms:
   • none of the implied terms contended in either case satisfy either the business efficacy test or the obviousness test.
   • In addition, the terms contended for could not be implied into the leases as they would have been inconsistent with the express terms.
3. Failure of basis and consideration:
   • For the doctrine of failure of basis to operate where there is a contract which is subsisting, there must find a gap in the contract where it does not provide for the circumstance encountered. However, there were no gaps in the leases. The leases took into account the allocation of risk between the parties.
   • The argument that a basis upon which the tenants must pay the rent was that the premises were capable of lawful use was rejected. The grant of a demise is the basis upon which the tenants must pay the rent.

Comment

While the decision provides clarity as to tenants’ contractual obligations under their leases whilst they were forced to close during the pandemic, this does not change the current situation for commercial rent arrears since the introduction of The Commercial Rent (Coronavirus) Act 2022.

The moratorium imposed by the Act means that the tenants in these cases are still protected in relation to arrears, which accrued within a certain protected period - with such period being dependent on the nature of the tenants’ business - during the pandemic.

If the tenants are unable to reach an agreement with the landlords with regards to the protected arrears, then they can refer the arrears to the binding arbitration scheme introduced by the Act.

However, tenants must act fast if this is the route they wish to take given that they only have until 25 September 2022 to make the referral and must have followed the procedure under the Act first.

The government has not indicated whether this date will be extended so, for tenants with arrears, time is running out. The arguments in these cases have not found favour with the Court, so arbitration is likely to be the only route available if the parties cannot come to an agreement. Once the moratorium expires, the landlord will have its full remedies available for the first time since March 2020 – the end of the road is nigh.