The Court of Appeal (England & Wales) has handed down judgment in the hotly anticipated appeals of Bank of New York Mellon (International) Limited v Cine-UK Limited and London Trocadero (2015) LLP v Picturehouse Cinemas Limited & ors by commercial tenants seeking relief from payment of rent during lockdown.
The tenants' arguments at appeal
In both appeals, the cinema tenants argued: 1) that a term should be implied into the lease to the effect that rent should be suspended while the premises could not be occupied during lockdown due to mandatory closure orders and 2) since the cinemas had been forced to close during lockdown and the premises not used for their intended purpose as set out in the lease, there should be no obligation to pay the rent during these times - in other words there was a complete failure of the basis upon which the parties had contracted in the lease.
The Bank of New York appeal also provided for a third argument, which said the tenant should be relived from the obligation to pay rent based on an interpretation of the rent cessation provision that the words "damage or destruction” (or similar) should be construed as extending to non-physical damage.
All three of the tenants' arguments were rejected by the Court of Appeal.
On implied terms, the Court preferred the view that the leases worked well without the need for implied terms to be read into them.
On the failure of basis argument, no gap was found in the contract that required to be filled to prevent an unjust enrichment to the landlord.
On rent cessation, it said that the insurance cover taken out by the landlord only applied where the tenant was not legally obliged to pay the rent and not where the tenant chooses not to pay; and, only where there had been physical damage or destruction by an insured risk.
The decision brings some certainty to commercial landlords, confirming their right to enforce against long-standing Covid-related rent arrears not captured by mandatory arbitration. However, the tenants may yet appeal to the Supreme Court - certainly on rent cessation it seems plausible.
More broadly, the tenants' failure of basis argument here could well be utilised in other commercial lease disputes, thereby side-stepping frustration arguments in English and Welsh commercial leases.
For commercial tenants, for now at least, it seems the scope for redress of Covid arrears is limited to statutory arbitration (but tenants should act fast, because that scheme is due to close on 23 September 2022) or other forms of alternative dispute resolution.
If you are a commercial landlord or tenant seeking to resolve commercial rent arrears or, you have any concerns or questions about the impact these decisions may have on you or your business, please do not hesitate to get in touch with our Real Estate Disputes team or your usual Brodies contact.