In another battle between landlords seeking to recover rent contractually due to them and tenants looking for assistance during a time of crisis, the Court of Appeal has handed down judgment in the Trocadero Covid rent arrears appeal. Disputes Partner, Gurpreet Sanghera outlines the case and considers what it may mean for commercial landlords going forward.
The outcome will be a relief for commercial landlords, as the Court of Appeal was unanimous in holding that the there was no failure of the basis upon which rent was due.
In one of the most controversial cases to arise out the pandemic and a decision that has stirred up a great deal of interest within the property world, it further clarifies the position for landlords and tenants who remain in dispute about rent arrears accrued during the pandemic.
The appeal in this case was heard together with Bank of New York Mellon (International) Limited v Cine-UK Limited, as both cases raised the same question: Were the tenants who operated cinemas at the premises liable to pay rent during periods when Covid-19 restrictions prohibited them from lawfully operating their cinemas?
In the Trocadero case, members of the Cineworld group sought to raise the following technical legal arguments in response to the landlord’s claim for rent arrears of around £2.9 million:
• Firstly, that terms should be implied into their leases allowing a suspension of rent payment and service charge during any period when the use of the premises as a cinema would be illegal and/or when attendance is lower than what the parties had anticipated at the point at which they entered into the leases.
• Secondly, that there had been a partial failure of consideration on the basis that the payments due under the leases were for use of the premises as a cinema and therefore no payments should be made during periods when the premises could not be used for their contractual basis.
To uphold the tenant’s arguments, the courts would be required to interfere with the contractual mechanism that governs the relationship between the parties. However, to interfere with the lease terms would change the landscape of the rules that traditionally govern the relationship between a landlord and tenant. Typically, a tenant signs up to a lease to take possession of premises and in return the landlord is paid a rent, usually at market value. The landlord’s business is to let premises and whilst it is in the landlord’s interest to ensure that the tenant runs a viable business, the tenant’s obligation to pay rent is unconnected to its ability to pay rent, save in the case where the rent is linked to turnover, which comes with its own complications.
The power of the courts to imply terms into a contract is limited and would only be used where it is necessary to give business efficacy to the deal between the parties or where the term is so obvious that it goes without saying.
The decision has been eagerly awaited by both landlords and tenants, with landlords concerned that the courts may have taken a sympathetic approach by reallocating the risk between the parties due to unprecedented circumstances and tenants holding on to the hope that the courts would be willing to intervene by reaching a decision that would be fair and reasonable in the circumstances.
Neither of these arguments were upheld by the judge in the first instance or by the Court of Appeal, where it was held that there was no “gap” in the leases to be filled, as the leases contained a carefully constructed contractual regime for the allocation of risk. The courts do not have the power to imply a term simply because it might be fair and reasonable.
It is therefore clear that the courts are not willing to interfere with the contractual relationship between a landlord and tenant when considering pandemic arrears, regardless of the impact on their business, as the courts remain reluctant to intervene in contracts where disputes have arisen.
The Court of Appeal’s decision follows a trend of recent judgments where the courts have ruled against tenants seeking to defend claims for rent arrears. Many tenants eagerly awaited the decision in the hope that the Court of Appeal would take a different approach and relieve them from their obligations.
The government introduced various measures to assist tenants during the pandemic, including a moratorium on commercial evictions, the introduction of a commercial rent code designed to provide guidance on how landlords and tenants should approach rent arrears negotiations and more recently, a legally binding arbitration process. However, there remain billions of pounds worth of commercial rent arrears with little, or in many cases, no recourse in the courts for tenants seeking to escape payment of rent arrears.
Landlords now have a clear route to claiming arrears. Tenants seeking to avoid increased costs should think carefully about whether they may be better served by embarking on the statutory arbitration process.
The decision will come as yet another blow for tenants that have incurred significant losses during the pandemic, many of whom are struggling to survive. The message by the government is clear: those who can afford to pay should pay, and landlords should continue to work with those tenants that cannot afford to pay to help them get back on their feet.
Only time can tell how the commercial rental market will recover after the pandemic. For many landlords, particularly in certain retail markets, the most viable option may still be to allow their tenants to continue to occupy premises with a view to avoiding business rates liabilities.
It also remains to be seen whether the tenants in these cases are prepared to take a third bite at the cherry by appealing to the Supreme Court.