Covid arrears claims: Latest case and a window of opportunity?

21st October 2021

Walker Morris’ specialist Real Estate Litigators Martin McKeague and David Manda consider the latest Covid arrears case law and explain a current window of opportunity for resolving rent and service charge claims via the courts.

Why is London Trocadero v Picturehouse Cinemas of interest to commercial landlords and tenants?

Shortly after finding in favour of the landlords in Covid arrears claims against tenants The Fragrance Shop and Cineworld, Mecca Bingo and Sports Direct [1], the High Court has again awarded summary judgment to the landlord, this time in London Trocadero LLP v Picturehouse Cinemas Ltd & Ors [2].

The decision will come as yet another blow to tenants hoping to escape rental liability accrued during the pandemic.

The tenants (cinema operators) sought to defend the £2.9m arrears claim on the bases of two relatively creative arguments:

• Implication of terms, i.e that terms should implied into the relevant leases that payment of rent and service should be suspended when use of the premises as a cinema was illegal due to the pandemic; and/or
• Failure of basis/failure of consideration. The concept of failure of basis, or failure of consideration, is predicated on the notion that a benefit conferred (here, payment of rent/service) is conditional.  If the condition is not fulfilled (here, the use of premises as a cinema), then receipt of the benefit amounts to unjust enrichment.

The High Court rejected these defences.  Use of the premises as a cinema was not necessary for the lease to work and neither was it fundamental (i.e. a condition, warranted by the landlord) to the basis on which the parties entered the lease.  Neither the legal test for implying terms, nor that for failure of basis, was met in this case.

What practical advice arises?

The implication of terms into commercial contracts (including leases) is potentially intrusive, such that the court will not imply terms lightly. In order for a term to be implied, it must be necessary to give business efficacy to the contract. The test is a high bar which asks whether, without the term, the contract simply does not work [3].

Issues such as liability for payment of rent and whether/when there should be a rent suspension relate to allocation of risk and are subject to negotiation between parties.  As a matter of law, a lease can work perfectly well if, as here, a tenant is liable in full for arrears accrued during the pandemic.  It is irrelevant that, commercially, the tenant would be better off if the landlord took some or all of the ‘hit’.

Where the parties have entered into a carefully drafted contract, particularly where they have been legally advised (both of which will apply in most commercial landlord and tenant relationships), it will be difficult to convince a court to imply terms.

Failure of basis/failure of consideration will only be available where the matter at hand was absolutely fundamental to the contract/lease – a condition commonly understood between the parties.  The London Trocadero case makes clear that mere permitted user provisions dictating use of premises as a cinema would not suffice to meet this test (the premises would still be available for a tenant to possess and they would still capable of being used for storage and other purposes associated with cinema use); whereas a warranty on the part of the landlord as to use of the premises as a cinema might suffice.

So, when faced with Covid-related arrears, landlords and tenants alike should remember that the wording of the particular lease will be paramount.

Window of opportunity

In our recent briefing we explained the UK government’s intention to introduce legislation to resolve Covid arrears cases where parties have been unable to agree.  Whilst details of the proposed legislation are yet to be confirmed, that legislation is expected to involve the ringfencing of arrears accrued when a business has had to remain closed during the pandemic; the making of allowances by landlords; and the undertaking of an arbitration process to reach a legally binding agreement where parties have been unable to voluntarily reach settlement.

The next few months would therefore seem to offer a window of opportunity in which landlords may wish to take advantage of the facts that the landlord’s ability to sue tenants for unpaid rent and other lease sums which have accrued during the pandemic remains unaffected, and indeed that the case law to date seems very much to favour landlords.

Similarly, the acknowledgement in London Trocadero that a more strongly worded lease might well be capable of underpinning a successful failure of basis argument might encourage tenants to seek advice, and potentially to take action, within that same window.

How we can help

Walker Morris’ dedicated Real Estate Litigators are experienced and expert in acting for both landlords and tenants, and in resolving all types of commercial lease disputes.  Our litigators also work closely with transactional colleagues, helping to ensure that clients’ commercial leases are drafted as advantageously as possible.

If you would like any advice in connection with pursuing or defending a Covid-related arrears claim; if you would like advice or assistance in relation to any of the wide range of other arrears-related remedies which currently remain open to landlords; or if you would like any assistance with the conduct or resolution of any commercial settlement negotiations, please do not hesitate to contact Martin McKeague, David Manda any member of the Real Estate Litigation team.

[1] See our earlier briefing for details and advice

[2] [2021] EWHC 2591 (Ch)

[3] For a term to be implied, it must be necessary to give business efficacy to the contract. The test is whether, without the term, the contract simply does not work.  In addition, the term to be implied must be obvious, capable of clear expression, and must not contradict any express term of the contract M&S v BNP Paribas [2015] UKSC 72