Court of Appeal rules in favour of landlord in Covid-19 arrears claim relating to the Trocadero cinema in London

Last month a three-judge panel at the Court of Appeal jointly heard the cases of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others alongside Bank of New York Mellon (International) Ltd v Cine-UK Ltd and other appeals on the basis that despite the differences of detail, the substance of the argument was the same in each case. 

Both cases centred around arguments by the tenants, Cine-UK and Cineworld, that the government legislation during the Covid-19 pandemic, which forced various premises to close - including cinemas -  rendered those buildings "unusable" and so the tenants were not liable to pay the rent during the lockdown periods. 

Both tenants lost in the High Court in 2021 but were granted permission to appeal the judgments. The Court of Appeal heard both cases together and in a ruling yesterday dismissed both appeals. This is yet another decision in favour of landlords with regards to the recovery of arrears during the pandemic. 

Background to the Trocadero dispute

The defendants (Picturehouse Cinemas Limited, Gallery Cinemas Limited and Cineworld Cinemas Limited) were tenants who had leased the cinema premises in the Trocadero Centre in London (which is Picturehouse's flagship cinema) together with their guarantors, and were seeking to avoid paying rent and other sums due to their landlord, London Trocadero (2015) LLP, the claimant.  

The tenants had not paid any rent from June 2020 up to July 2021 as during those times government regulations required the cinema to close for certain periods. Even when it became lawful to re-open, trading conditions were so poor that the cinema remained closed for the most part. The tenant therefore argued that it was not liable because it was either unlawful or unviable to use the premises as a cinema during that time. 

The landlord issued proceedings in October 2020 and sought summary judgment for these arrears of rent and service charge totalling £2.9m and the tenant resisted the application on two grounds:

• Implied terms - A term was implied into the leases suspending payment of rent and service charge during the periods where it was unviable or unlawful to operate the premises as a cinema.
• Failure of basis - There had been a failure of basis/consideration as the payments were for the use of the property as a cinema (meaning no payments were due when the property could not be used as a cinema).

What did the High Court decide?

The court found the tenants had no real prospect of successfully defending the claims against them and granted summary judgment to the landlord. In respect of each point argued by the tenant, the court ruled on the two key points as follows:
 

• It reiterated the default position, referring to the M&S v BNP Paribas case, that a term can only be implied into a contract where the term must be so obvious that it goes without saying or it is necessary to give the contract business efficacy. The court decided that the requirement for the tenant to keep paying rent in these circumstances did not deprive the leases of business efficacy and there was no reason the losses arising from the pandemic should be borne by the landlord.
• It decided that there was no failure of basis as the use of the premises as a cinema was not fundamental to the basis on which the parties had entered into the leases, it was only an expectation which motivated them to do so. The leases also addressed situations where the cinema would not be used as a cinema (for example during damage or destruction by any insured risks) and passed the burden of risk in these instances to the landlord.

So, at first instance, the court ordered summary judgment in favour of the landlords on the basis that the tenants had no defence to the claim for the arrears of rent.

High Court decision affirmed 

Despite the Court of Appeal granting permission for the tenants to appeal the High Court judgment, it subsequently dismissed the appeal, putting an end to the debate over who bears the financial burden in these circumstances. 

When the judge considered the tenant's argument regarding implied terms and the business efficacy test, he affirmed the first instance decision, confirming that the requirement for the tenant to pay the rent even though the premises could not be used for the permitted use "did not lead to the conclusion that the leases lack commercial or practical coherence."

The court also affirmed the reasoning of the judge at first instance, in rejecting the tenant's failure of basis argument. In doing so, the court reiterated that the question of whether or not something was fundamental to the basis on which the parties entered into the leases must be answered taking into account the specific lease terms and the allocation of risk between the parties. The judge specifically identified the proviso in the lease in which it was made clear that the landlord gave no warranty as to the ability of the tenant to lawfully use the premises for the permitted use and that therefore this risk had already been allocated by this term, to the tenants.

Osborne Clarke comment

For tenants who have still not reached agreement with their landlords, or commenced the arbitration process under the Commercial Rents (Coronavirus) Act 2022 for protected rent debt, this outcome is a cautionary warning to consider their options wisely. 

In light of the recent first arbitration judgments under the Act and this ruling, it seems clear that courts and arbitrators are not willing to accommodate difficulties faced by tenants during this time, at the expense of developing or departing from existing principles or specific legislation. This will be welcome news to landlords who were left with few meaningful routes to rent arears recovery during the Covid-19 moratoriums.

It would appear that all possible arguments that a tenant could seek to rely on in these circumstances have been dismissed in several authorities addressing these issues. The property industry is already seeing the consequences of these decisions manifest in lease negotiations, with many tenants seeking the inclusion of so-called "Covid clauses" to address the perceived imbalance of risk in the event of unforeseeable circumstances leading to the closure of business premises, especially in circumstances where business interruption insurance premiums are no longer a cost-effective way of addressing this risk.