On the Eleventh day of Christmas 2022...

... Alison Willis from Irwin Mitchell’s Real Estate Disputes team reflects on another key case from 2022.

Whilst the closure of non-essential retail, leisure and hospitality venues during the height of the Coronavirus pandemic is hopefully starting to feel like a distant memory, the after-effects of the pandemic are still being felt by landlords and tenants alike.  One of the most important cases this year for many landlords and tenants was the Court of Appeal case Bank of New York Mellon (International) Limited v Cine-UK Limited and London Trocadero (2015) LLP v Picture House Cinemas Limited & others [2022] EWCA Civ 1021.

This case dealt with the conjoined appeals by the tenant defendants of two High Court cases where the landlords had successfully obtained judgments for the payment of arrears of rent for periods during which the premises were closed due to Covid restrictions.  Both tenants operated a cinema from the premises and the tenants had unsuccessfully argued they were not liable for rent during these periods of closure.  The two tenants were granted permission to appeal.

The Court of Appeal dismissed the appeals.

Appeals

Bank of New York (“Hengrove”) Appeal

At first instance, the court rejected the tenant’s argument that the landlord could recover the loss of rent through its insurance policy.  It was held that rent could only be “lost” where the rent cesser clauses in the lease were engaged and in the tenant’s lease, rent was only suspended in the event of physical damage or destruction to the premises.

The court also rejected the tenant’s argument that a term should be implied into the lease to the effect that the payment of rent should be suspended for any period during which the use of the premises for its intended purpose, in this case as a cinema, is illegal.  The court held that there was no need for a term to be implied into the lease in circumstances where the parties had specifically addressed in the lease the conditions where rent should be suspended, and there was no reason why the term was so obvious it ought to be implied.

The tenant appealed this decision on grounds including that: -

• The rent cesser clause should not be interpreted to refer only to physical damage, and that the tenant should be relieved of its obligation to pay rent by virtue of this clause (“the rent cesser defence”); and
• A term should be implied into the lease to suspend any payments of rent where use of the premises is illegal (“the implied term defence”).

Trocadero Appeal

At first instance, the court rejected the tenant’s argument that there was a failure of basis as the lease was entered into on the expectation and common understanding that the premises could be lawfully used as a cinema and that this was the basis on which rent was payable.  The court held that the basis for paying rent was the demise of the premises for a 35 year term.  Any other contention was inconsistent with the express terms of the lease which set out a contractual regime for the allocation of risk.

The tenant also raised similar arguments in relation to implied terms, namely that an implied term was necessary for business efficacy, which were also rejected by the court.

The tenant appealed the decision on grounds including that: -

• There was a failure of consideration and the use of the premises was fundamental to the lease, as such there was a claim to unjust enrichment during periods where the business was forced to close (“the failure of basis defence”).

Appeal Decision

Rent cesser defence

The court rejected the tenant’s argument in the Hengrove appeal and held that the clause only operated where an ‘Insured Risk’ caused physical damage and destruction.  Furthermore, the insurance provisions applied where the tenant was not legally obliged to pay the rent (eg. where the rent cesser applied), not where the tenant chooses not to or cannot pay the rent.

Implied term defence

The court rejected the tenants’ argument and decided that both leases worked perfectly well without the implied term and so the tenants’ obligation to pay rent continued unless the rent cesser provisions were engaged (which they were not).  An implied term was not required for business efficacy nor was it an “obvious” term.

Failure of basis defence

The court rejected the tenants’ argument and decided that the basis of the tenants’ obligation to pay rent was the demise of the premises for a 35 year term.  The failure of basis argument, would interfere with the agreed allocation of risk set out in the leases and would be inconsistent with the express terms of the leases.  In the Hengrove lease, there was a provision for the tenant to change the permitted use with the landlord’s consent and in the Trocadero lease, the tenant had covenanted to comply with any statutory obligations in respect of the premises.  There was no “gap” in the lease which required filling by a claim in unjust enrichment.

Comment

This decision gave further clarity for landlords and tenants who were yet to settle their disputes for unpaid rent and service charges during the Coronavirus pandemic, and came out just in time for those disputes which were referred to arbitration pursuant to the Commercial Rent (Coronavirus) Act 2022.

The decision also highlighted a couple of other noteworthy points.  First, the test for implying a term into a contract is a stringent one and a term will not be implied simply because it is fair to do so.  The test is one of necessity, not reasonableness.  Secondly, when considering whether something is fundamental to the basis on which parties entered into a contract, the express contractual terms and the allocation of risk between the parties must be considered carefully.