“You had me at Summary Judgment” – Cinema tenant challenge to landlord Covid-arrears claim fails

“You had me at Summary Judgment” – Cinema tenant challenge to landlord Covid-arrears claim fails

This article was published on: 4th October 2021

“Covid Arrears”

One particularly underwhelming consequence of the pandemic has been the introduction of a new phrase into the litigator’s parlance – “Covid arrears”; commercial lease debts accrued during the various periods of closure and lockdowns.

 

 

 

Through the introduction of various measures, commercial landlords have found their usual enforcement tools severely blunted, notably in relation to commercial rent arrears recovery, winding up petitions and forfeiture.  Even the “persistent rent arrears” ground for refusing a new lease has been taken off the table.

There are further changes on the horizon[1] which been well documented, and a “binding arbitration” scheme is expected to be introduced in the not-too-distant future.

In the meantime, one option that has remained available to indebted landlords has been to issue debt proceedings and seek Judgment.  Several well-publicised claims have been defended unsuccessfully and concluded at summary Judgment.  A series of arguments have been roundly rejected involving rent cessers, insurance and implied terms.

Another case[2] has now been reported which continues the trend.

The Background

The Landlord of the Trocadero Centre, London, brought a claim against a tenant of two cinema premises, together with a former tenant and guarantor.

In March 2020, those cinemas had to close fully – there was no alternative use available.  Rent was unpaid from June 2020 and the landlord sought to recover £2.9m in rent and service charges.  An application for summary judgment was brought – the landlord needed to satisfy the Court that the tenant had “no real prospect of successfully defending the claim” and there was no other compelling reason for the matter to proceed to trial.

The Defence

The tenants argued they should not be liable for the arrears, relying on the following:

  • Implied Term

During the periods of closure, it was illegal to use the premises as a cinema.  During other periods, attendance would be at a level far lower than anticipated when the leases were completed.

As such, there should be a term implied into the leases suspending the obligation to pay rent/service charges during those periods.

  • Failure of Basis

Often termed “failure of consideration”, this lesser-known legal argument centred on the fact that payment of rent was made in consideration for the use of premises as a cinema.  If the premises could not be used as such, no rent should be payable during those periods – known by the legal phrase as a “partial failure of basis” during those periods.

The Decision

The Court rejected both arguments.  The test for implying a term into contracts is well-established[3] – was the implication of a term necessary to give the lease “business efficacy” or was the term so obvious that it goes without saying?

“No”, was the answer.  The parties were free to negotiate terms and both parties were free to mitigate their own risk through obtaining insurance.  There was “no good commercial reason why the loss should necessarily be borne by the landlord” and the unforeseen circumstances did “not deprive the leases of business efficacy or mean that they lack commercial or practical coherence”.

On failure of basis, the Court ruled that use of the premises as a cinema was not fundamental to the basis on which the leases were granted; that use was merely a motivating factor.  The leases also stated the landlord gave no warranty that the premises could lawfully be used as a cinema.

There was, therefore, no failure of basis, and the Court suggested this argument might not actually be a defence to a contractual claim at all (though it might be a counterclaim).

Summary Judgment was granted, with the overall sum reduced by reference to the tenants’ counterclaim concerning insurance and other matters.

The Adjournment Request

In addition to the forthcoming binding arbitration scheme, permission to appeal the “Cine-UK[4] decision was recently granted. The tenants attempted to secure an adjournment pending the introduction of the scheme and the appeal outcome.  Both arguments were rejected.

The Future

The industry continues to await the introduction of the Government’s various announcements into law. Press releases have given some insight but detail is lacking.  Widespread review of long-standing legislation, such as the Landlord and Tenant Act 1954, might also take place.

Until then, it remains open to a landlord to issue debt recovery proceedings, and, to date, tenants have been unsuccessful in their attempts to escape liability. However, the door is not completely shut – each case will always turn on its own facts.  In the words of the Judge:

“…in the case of a lease, an inability to use premises for the intended purpose is unlikely to constitute a failure of basis as it may be relevant to the presumed allocation of risk between the parties.  However, there can be no general rule.  Each case will depend on its own facts.”

The appeal of Cine-UK or future decisions (including this one?) might alter the landscape.  In the meantime, the (non-binding) Code of Practice[5] remains in place and parties continue to be encouraged to reach solutions which preserve a successful future landlord/tenant relationship in a market which continues to adapt and evolve.

[1] E.g. https://www.gov.uk/government/publications/resolving-commercial-rent-arrears-accumulated-due-to-covid-19

[2] London Trocadero (2015) LLP v (1) Picturehouse Cinemas Limited (2) Gallery Cinemas Limited (3) Cineworld Cinemas Limited [2021] EWHC 2591 (Ch)

[3] E.g. Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd and another [2015] UKSC 72

[4] Bank of New York Mellon (International) Limited v Cine-UK Limited [2021] EWHC 1013 (QB)

[5] https://www.gov.uk/government/publications/code-of-practice-for-the-commercial-property-sector

Author: Paul Sagar, Senior Associate

Landlords or tenants seeking advice on the above issues should contact us on 0330 320 1440, by email hello@hagenwolf.co.uk, or fill in our online Contact form.

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