Covid was no defence to obligations to pay rent
Bank of New York Mellon (International) Ltd v Cine-UK Ltd; London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2022] EWCA Civ 1021 illustrates how the English courts will approach cases where commercial tenants seek to resist paying rent during periods of COVID-19 restrictions. The decision demonstrates that COVID-19 related claims face an uphill struggle with the courts unwilling to interfere with the allocation of risk set out in the contract.
Background
In March 2020, the UK Government announced the closure of all non-essential retail, leisure and hospitality venues. This prevented the appellant tenants from lawfully operating their cinemas from the rented premises. They did not pay rent during those periods claiming they had no obligation to do so. The landlords issued proceedings for the rent and the judge at first instance ordered summary judgment in favour of the landlords.
The tenants appealed, advancing a number of grounds why they were not liable to pay rent for the periods during the COVID-19 pandemic when they were unable to lawfully operate their business at the premises.
Key arguments
Both appellants argued that:
- as the operation of cinemas was unlawful due to Government restrictions imposed during the pandemic, there was ‘a failure of basis’; and
- it was an implied term of the lease that the tenant would not be obliged to pay rent during periods when the premises could not lawfully be used as a cinema.
Additionally, in the Cine-UK Ltd case the tenant argued that it was relieved from the obligation to pay rent by the rent cesser clause. This is a clause in a lease which provides that a tenant’s obligation to pay rent under the lease is suspended in certain instances. For example, in the case of physical damage or destruction rendering the premises unfit for occupation or use.
Decision
The Court of Appeal dismissed the appeals brought by the commercial tenants, finding they were not relieved of the obligation to pay rent while they were unable to operate their businesses due to COVID-19 restrictions.
On base (1) above, the Court held that there was no ‘failure of basis’ that would permit an unjust enrichment claim (such a claim requires a defendant to benefit at the expense of the claimant, and for this benefit to be unjust). The court made reference to the following comments made by Carr LJ in Dargamo Holdings Ltd v Avonwick Holding Ltd [2021] EWCA Civ 1149
"…that an unjust factor does not normally override a legal obligation of the claimant to confer the benefit on the defendant. The existence of the legal obligation means that the unjust factor is nullified so that the enrichment at the claimant's expense is not unjust..."
The contract as a whole was not invalidated in this instance and there was no ‘gap’ in the contract that would allow such an application of unjust enrichment. On the contrary, the contract was a carefully worked out scheme for allocation of risk that would be subverted if unjust enrichment were applied to it.
On base (2) above, the Court held that there were no implied terms: the risk that the premises could not be used other than in circumstances where the cesser of rent clause applied was allocated to the tenant in the lease as negotiated by the parties. The Court found that the business efficacy test (“where, without the implied term, the contract would lack commercial or practical coherence”), and the obviousness test (where “the term which it is sought to imply has to be precisely expressed and must be so obvious to go without saying”) were not met. There is little room for implying terms into contracts drafted by professional lawyers and such implication would be inconsistent with the express terms of the leases, in that it would change the allocation of risk set out in the contract.
On the additional argument raised in the Cine-UK Ltd appeal, the Court held that the cesser of rent clause, as a matter of construction, did not apply to this situation. The clause only operated where the property was physically damaged or destroyed by an insured risk. “Damage” was not broad enough to include financial or non-physical damage. Further, the damage had to be to the property; here it was the tenant which had suffered the financial or economic damage.
Key takeaways
This case is a robust commercial decision which will provide comfort to commercial landlords. It also provides a demonstration of the high threshold the courts apply when considering when to imply contractual terms in the business context.
With thanks to Jamie Popplewell for his assistance in preparing this post.