The Court of Appeal yesterday (27 July 2022) published its decision in two linked appeals, Bank of New York Mellon v Cine-UK Limited and London Trocadero (2015) LLP v Picture House Cinemas Limited [2022] EWCA Civ 1021, both of which concern COVID-19 rent arrears and will be of considerable interest to commercial landlords and tenants.

In summary, the Court held that:-

1. Even though they could not lawfully occupy their premises for certain times due to the pandemic, the tenants still remained liable to pay all rents under their leases; and

2. Even where the insurance paid for by the tenant provided cover for the pandemic, the tenants did not have the benefit of such cover as their leases only provided for a rent cesser where there was physical damage preventing occupation of their premises.

So the only option left to the tenants now to avoid paying all their rent will be to seek an award via arbitration pursuant to the new Commercial Rent (Coronavirus) Act 2022 in relation to the ring-fenced arrears based on an inability to pay all of these and to remain financially viable.

The decision also highlights an important point regarding the relationship of insurance cover and rent cesser provisions, namely that they will not necessarily be a mirror image of each other, which can lead to a mismatch. Here that meant there might be circumstances in which the landlord could benefit from its insurance policy, for which the tenant had to pay, even where the rent cesser provisions weren’t engaged, for example in relation to non-physical risks. The tenant would have paid for insurance from which it could derive no benefit during a period in which it could not trade but remained on the hook for the rent.

The Judgment will come as a relief to commercial landlords still locked in negotiations with their tenants regarding COVID-19 rent arrears, and also provides a helpful restatement and summary of several important principles of contract law.

Background

The appeals were brought by the tenants (who operated their premises as cinemas) in respect of decisions of the High Court where it was held that the tenants had no defence to claims for rent relating to periods during the COVID-19 pandemic in which they were required by Coronavirus Regulations to shut their premises.

The appeals were brought primarily on two grounds. First, that the Coronavirus restrictions which prevented the tenants from operating their premises as cinemas caused a failure of basis (i.e. that it was fundamental to the basis of the leases that the premises would be capable of lawful use as a cinema), thereby relieving them of the obligation to pay rent for those periods; and second, that it was an implied term of the leases that the tenants should be relieved of their obligations to pay rent where they could not lawfully use the premises as cinemas. In Bank of New York Mellon, the tenant additionally argued that a rent cesser clause in its lease ought to be construed in such a way as to relieve it of its obligation to pay during the period of the restrictions.

The decision

On the issue of the rent cesser clause, the Court held that the relevant clause only contemplated the suspension of the rent in circumstances where the premises were caused to be unfit for use of occupation by physical damage or destruction which may require rebuilding or reinstatement. The clause was not wide enough to encompass “damage” in the sense of financial damage, as the damage in question had to relate to the property itself, which is not a legal entity, rather than the tenant; and, read as a whole, it was clear the clause was concerned solely with physical damage.

As to the implied terms, the Court held that this argument also failed, as the proposed terms satisfied neither of the applicable tests, being (1) that the term is necessary to give business efficacy to the contract; and/or (2) that the term is so obvious that it goes without saying.

The “failure of basis” argument was also unsuccessful, as the Court held that the ability to use the premises lawfully as a cinema was not a fundamental basis of the lease. The true “basis” of the lease was the demise of premises for a 35-year term and the Court had no power to inquire into an alternative basis that was plainly contrary to the express basis freely agreed between the parties. Further, there was no “gap” in the leases to fill by the law of unjust enrichment, as the leases contained a carefully worked out contractual regime for the allocation of risk. The assertion that there had been a “failure of basis” was inconsistent with that regime and contradicted the terms of the leases in a way which the law does not permit.

A copy of the Judgment can be found here.