Covid arrears: Trocadero appeal heeds warning for tenants

What legal and practical advice arises for parties dealing with Covid arrears?

The decision should be incredibly helpful for landlords currently in Covid-related arbitration or considering issuing court proceedings in respect of Covid arrears. It should also heed a salutary warning to tenants who have yet to settle their disputes.

The case clarifies that, failure of basis/failure of consideration [2] will only be available to enable a tenant to escape or minimise Covid arrears where the matter at hand was absolutely fundamental to the contract/lease – i.e. a condition commonly understood between the parties.  For example (and as was the case here), mere permitted user provisions dictating use of premises as a cinema would not suffice to meet this test because the premises would still be available for a tenant to possess, and they would still be capable of being used for storage and other purposes associated with cinema use.  A warranty on the part of the landlord as to use of the premises as a cinema might, however, suffice.  When seeking to rely on failure of basis/failure of consideration arguments, therefore, landlords and tenants should remember that the wording of the particular lease will be paramount.

The London Trocadero case is also a reminder that the courts will not imply terms into leases (or indeed any commercial contracts) 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].  Where the parties have entered into a carefully drafted lease or 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 so as to achieve a desired commercial outcome.

As we reported in our earlier briefing, the Commercial Rent (Coronavirus) Act 2022  (CR(C)A) imposed a moratorium to prevent enforcement action being taken in relation to protected rent debts for six months (i.e. until after 24 September 2022) or, where the Covid arrears arbitration process was instituted within that time, until after the arbitration process had concluded. As the window for applying for CR(C)A arbitration has now closed and the moratorium lifted, the London Trocadero decision may spur many landlords into issuing court proceedings for Covid arrears. Tenants facing such claims should be motivated to settle quickly and at as little additional cost as possible, on the most commercially-favourable and cash flow-friendly terms they can.

What happened in the case?

The tenant had argued that there was an implied term in its lease which suspended the obligation to pay rent and service charge during the period in which it was unlawful for the premises to open as a cinema as a result of Covid-related lockdown. On 27 July 2022 the Court of Appeal, affirming the High Court’s earlier decision, decided that the tenant’s implied term argument was baseless.

The Court of Appeal also upheld the High Court’s decision that there had not been a failure of basis/consideration on payments of rent to use the property as a cinema. The Court of Appeal confirmed that, in order to determine this, a court must take into account the terms of the lease. 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.

How we can help with Covid arrears

Walker Morris’ specialist Real Estate Litigators are experienced and expert in acting for both landlords and tenants and can assist clients with pursuing commercial rent arrears claims, negotiating and documenting settlements and/or conducting/concluding the CR(C)A arbitration process.

If you would like any advice in connection with pursuing or defending a commercial rent arrears claim, if you have any queries regarding the decision in London Trocadero v Picturehouse Cinemas and how this may affect your position, or if you would like information or assistance in relation to any other arrears-related remedies, please do not hesitate to contact Martin McKeague, David Manda or Lewis Couth.

[1] London Trocadero (2015) LLP v (1) Picturehouse Cinemas Ltd (2) Gallery Cinemas Ltd (3) Cineworld Cinemas Ltd and Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2022] EWCA Civ 1021

[2] 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.

[3] M&S v BNP Paribas [2015] UKSC 72