Gurpreet Sanghera, Simkins

In a decision the property industry eagerly awaited, the Court of Appeal has upheld the High Court’s decision in the case of London Trocadero (2015) LLP -v- Picturehouse Cinemas Ltd [2021], where the landlord was granted summary judgment in relation to its claim for rent arrears accrued during the pandemic.

In response to the pandemic, government regulations required cinemas across the UK to shut down their businesses to slow down the spread of Covid-19. The cinema complex at the Trocadero in London was forced to close for various periods between 21 March 2020 and 17 May 2021. Consequently, their revenue dropped to below three percent for the same period from the previous year.

Following this unprecedented decline in revenue, the tenant withheld rent due to their landlord under their leases. London Trocadero issued proceedings to recover the arrears of rent and the High Court ordered summary judgment in favour of the landlords. The tenants subsequently sought to appeal the decision.

Members of the Cineworld group sought to defend the landlord’s claim by raising various technical legal arguments bringing hope to many tenants across the country who have yet to resolve the issue of pandemic rent arrears.

First, the tenant argued that terms should be implied into the leases which provide that the obligation to pay rent should be suspended for periods of time when the permitted use of the premises, as defined in the leases, would become illegal.

Secondly, sums due would only be payable in respect of the period during which the premises could be used for its intended purpose as a cinema, and with attendance at a level commensurate with that which the parties would have anticipated at the point at which the leases were granted.

Thirdly, as the lawful use of the premises as a cinema was fundamental to the basis on which the parties entered into the lease. As the premises could not be used for their contractual purpose, there had been a failure of consideration and so no payments should be made for this period. 

Implied terms 

The Courts are extremely reluctant to interfere with the express terms of a contract and will only imply terms where the contract would otherwise lack commercial or practical coherence or where the term was so obviously intended at the time of contracting as to go without saying.

In respect of the former, the Court of Appeal held that the lease required the tenant “to continue paying rent where the cesser of rent provisions are not applicable” and therefore already provided a legitimate allocation of the risk, namely, that the tenant would bear the burden if the premises could not be used for their intended purpose. 

It was also held that the latter did not apply because the implied term must be so obviously intended at the time of contracting as to go without saying. It was clear to both courts that this was not applicable. The Court of Appeal’s reading of the lease suggested the opposite was true: if asked, the landlord would have said “of course not, the rent is payable unless physical damage to or destruction of the premises has rendered them unfit for occupation or use”.

The Court of Appeal was even more dismissive of the “completely unworkable” second implied term. Implication of terms is considered as at the time the contract is made, yet there was “simply no evidence” to indicate what level of attendance the parties anticipated for 2020 and 2021 when the lease was agreed in 1994.

Failure of Basis

As for the failure of basis defence, the High Court rejected the claim that the use of the premises as a cinema was fundamental to the basis for entering the lease.

The lease “clearly contemplates that there may be circumstances where it is not lawful to use the premises for the Permitted Use” as a cinema, such as in the event of damage or destruction of the premises by any Insured Risk.

This effectively allocated the burden of risk to the landlord and supported the argument that use of the premises as a cinema was an expectation that motivated the tenants to lease the premises, not fundamental to its basis. The failure of basis defence was therefore inconsistent with the terms of the lease and intention of the parties.

Comment

Perhaps unsurprisingly, the court remains hesitant towards implying terms into commercial contracts. The efficacy and obviousness tests are the port of call, and the courts have made it clear that they will not imply terms into contracts even for extreme and unprecedented events.

Tenants hoping to use a property for one specific purpose should place special emphasis on this during negotiations. In the Trocadero case, the definition of Permitted Use as a cinema was unpersuasive when compared with the terms that directly allocated risk to either party.

It must be clear that the parties had the same interests and purposes for leasing the property, and where this was not possible, the risk was allocated to the landlord. This seems like a tough sell, but the old rule remains for property lawyers: contract is king.

 Although it remains to be seen whether the tenants will appeal the verdict, this case seems to put the nail in the coffin for tenants hoping to avoid paying rent arrears from the pandemic. But where there are losers there are winners, and landlords who remain out of pocket have just received a major sign of support.