Rent arrears - third recent ruling in favour of landlords

The High Court has handed down its judgment in the case of London Trocadero (2015) LLP -v- Picturehouse Cinemas Ltd [2021] EWHC 2591 (Ch)[1] by granting summary judgment in favour of the landlord, London Trocadero (2015) LLP in relation to a claim for rent and service charges.  This is the third recent ruling in favour of landlords where the court has been asked to consider similar claims.  Notably, the court rejected the argument that the case should be adjourned pending implementation of the government’s proposals for arbitration.

Background

The tenant held two leases of premises used as a cinema in the Trocadero Centre, London.  The user clause in the leases provided that the premises could only be used as cinema.  

As a result of regulations introduced by the government during the pandemic, the cinema was forced to close for certain periods of time.  The tenant had not paid rent since June 2020 and as a result the landlord sought summary judgment for arrears of rent and service charges to the sum of £2.9 million.  

Members of the Cineworld group sought to defend the landlord’s claim by raising the following arguments:

     1.    that terms should be implied into the leases allowing payment of rent and service charge to be suspended during any period where the use of the premises as a cinema would be illegal and/or during which attendance would not be at a level that the parties would have anticipated when they entered into the leases; and

     2.    there had been a partial failure of consideration on the basis that the payments due under the leases were for the use of the premises as a cinema and therefore no payments should be made for periods where the premises could not be used for their contractual purpose.

The landlord argued that the requirement to pay rent even though the premises cannot be used for their intended purpose does not deprive the leases of business efficacy or mean that they lack commercial or practical coherence.  

Legal Position

Implied Terms

The power of the courts to imply terms into a contract is fairly limited.  The court will not imply a term as a matter of interpretation unless: (i) it is necessary to give business efficacy to the contract and/or (ii) the implied term is so obvious that it goes without saying. It is not enough that a term might be fair or reasonable, nor that the parties would have agreed to it had it been suggested to them.

The suggested implied terms were: 

     “(a) That if the Permitted Use of the premises by [the tenant] under the leases were to become illegal, then the obligation to pay rent and service charges otherwise due thereunder would be suspended and cease to be payable for that period;

     (b) That the sums due under the leases would only be payable in respect of the period during which the premises could be used for its intended purpose, as a cinema with attendance at a level commensurate with that which the parties would have anticipated at the time that the 1994 Lease and the 2014 Lease were entered into”

The tenant argued that their income would derive from use of the premises as a cinema and that it is both obvious and necessary for business efficacy that rent should not be payable during periods where the premises cannot be used as a cinema.  They went onto make the point that it would be open for the landlord to arrange insurance for loss of rent during the pandemic. The landlord however argued that it would be equally open to the tenant to take its own insurance for business interruption.  

When considering obviousness, the landlord’s position was that as the leases contained express terms providing no warranty for use and permitted suspension of rent in circumstances where the premises become unusable under an insured risk, it cannot be said that it is obvious that the tenant should be excused from paying rent for any period when the premises cannot be used for its intended purpose. Further, it was argued that the second implied term was equally non-obvious because there was no evidence of any forecast attendance levels being discussed by the parties and the length of the leases (more than 25years) meant it was impossible to decide the levels at which rent payments would be suspended.

Failure of Consideration

For a failure of consideration argument to succeed, it must be shown that a party has failed to fulfil its contractual obligations yet received the associated benefit.

The tenant sought to argue that the use of the premises as a cinema was fundamental to the basis of the leases.  The landlord however argued that “the foundation of the lease is simply the grant of a term of years to the tenant in return for the payment of rent and other sums due under the leases…any understanding as to how the premises are intended to be used cannot be fundamental to the basis but… is merely an expectation which motivated a party to enter into a contract”.

Judgment 

It was held that neither of the proposed implied terms met the business efficacy nor obviousness test and were also inconsistent with the express terms of the leases.

Judge Vos said: “In my view, the requirement for the tenant to pay rent even though the premises could not be used for the intended purpose as a result of unforeseen, extraneous events does not deprive the leases of business efficacy or mean that they lack commercial or practical coherence.”  He added: “There is no good commercial reason why the loss should necessarily be borne by the landlord.”

Further, it was held that in light of the existing terms of the leases, the continued use of the premises as a cinema was not the basis for the parties to enter into the contract. Judge Vos highlighted that both parties had considered the allocation of risks within the terms of the lease and the suggested failure of basis would interfere with the agreed allocation.

Comment

This case highlights the stringent threshold that must be met to imply terms into a contract and the importance of the intent of parties when entering into a lease.  

The case supports previous decisions in favour of landlords seeking to recover arrears or rent and service charges during periods where tenants have been unable to trade from their premises as a result of the restrictions put in place by the government due to Covid-19.