Asma Muneer and Louise Low, in our Dispute Resolution team, look at the liability of commercial tenants for rent arrears which accrued during the Coronavirus pandemic.
The recent case of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd  EWHC 2591 has provided further guidance in relation to a commercial tenant’s liability for rent arrears which accrued during the Coronavirus pandemic.
In this case, London Trocadero (the Landlord) rented premises to the First Defendant and Tenant, Picturehouse Cinemas. The Tenant, along with the Second and Third Defendants are members of the Cineworld Group and used the premises as a cinema. The Landlord brought a claim in July 2021 in order to recover outstanding rent arrears (together with service charges) owed by the Defendants in the sum of around £2.9 million that had accrued since June 2020.
The Tenant applied to adjourn the summary judgment hearing pending the introduction of the Government’s ring-fencing scheme. The application was refused.
In June 2021, the Government announced its intention to 'ring-fence' tenant debts arising during the Coronavirus pandemic and to introduce mandatory arbitration to resolve rent arrears disputes, as mentioned in our previous article. The Government published a policy paper in August 2021 which provided some further information about the proposals, but it leaves a number of important questions unanswered and there is still uncertainty surrounding the scheme.
Landlords and tenants who are currently navigating pandemic debts may be reluctant to reach an agreement, as they wait for legislation that could be more favourable to their position than the terms of any settlement which is reached now.
The case proceeded to a summary judgment hearing. The Tenant asserted that they were not liable to pay the arrears because they accrued during a time that the Government implemented Coronavirus related national lockdown restrictions that meant cinemas had to cease or limit operation, between 21 March 2020 and 19 July 2021. They argued primarily that a term should be implied into the lease retrospectively, stating that rent and service charge was to be suspend during any period for which the use of the premises as a cinema was illegal. They argued in the alternative that there was a failure of consideration (or ‘failure of basis’) because the payments were for the use of the premises as a cinema and that was the purpose that the premises was let for, so for the periods when the premises could not be used as a cinema, no rent was payable.
The Landlord’s position was that the Tenant’s inability to use the premises as a cinema did not mean the lease was commercially or practically incoherent. They did not accept that English law recognises a partial (as opposed to a total) failure of basis.
The Judge rejected the Tenant’s arguments, stating that the risk is clearly borne by the Tenant but that there was no good commercial reason why the loss should necessarily be borne by the Landlord. To imply a term to suspend the rent and service charge was not necessary to give business efficacy to the lease. Furthermore, that failure of basis could not be established because the use of the cinema was not fundamental to the basis on which the parties entered into the lease. The Tenant was found liable to pay the outstanding rent.
The case highlights that whilst some allowances have been made to account for financial hardship caused by the Coronavirus pandemic, there is a limit as seen by this determined but ultimately unsuccessful defence. Although the Tenant has recently obtained permission to appeal the Judgment and the case will now be considered by the Court of Appeal and so the outcome will be eagerly awaited by landlord and tenants as they look for clarity on how rent arrears during the pandemic should be dealt with.
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This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.