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High Court confirms that landlords can still resort to court proceedings to recover unpaid rent

The recent changes to the restrictions on winding-up petitions will have been disappointing to commercial landlords (see our previous article: Restrictions on winding-up petitions: beginning of the end). However, the case of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd [2021] EWHC 2591 (Ch) confirms that it remains open to a landlord to commence court proceedings against a tenant to recover unpaid rent. The decision is the third success for landlords this year (see our previous article, which contains reference to the earlier cases).

London Trocadero (2015) LLP, the landlord in respect of two leases of cinema premises at the Trocadero Centre in London, commenced proceedings and sought summary judgment against Picturehouse Cinemas Limited, Gallery Cinemas Limited and Cineworld Cinemas Limited to recover £2.9m of unpaid rent and service charge arrears that had accrued since June 2020. As is the case for many businesses in the hospitality sector, the cinemas were closed for a significant period throughout the Covid-19 pandemic, opening for only 71 days between 23 March 2020 and 16 May 2021.

The defendants argued that they were not liable for rent and service charges which relate to periods when the premises could not be used as a cinema. They put forward two main arguments:

1. Implied term

  • The defendants argued that terms should be implied into the leases to the effect that payment of rent and service charges should be suspended during any period for which the use of the premises as a cinema is illegal and/or during which attendance would not be at a level commensurate with that which the parties would have anticipated at the time when the leases were entered into.
  • A term will not be implied into a contract unless, on an objective assessment of the terms of the contract:
    • the contract would lack commercial or practical coherence without the term (the business efficacy test); or
    • the implied term is so obvious it goes without saying (the obviousness test).
  • The court held that the defendants failed on both tests:
    • The court did not accept that the requirement for the tenant to pay rent even though the premises could not be used for the intended purpose because of unforeseen, extraneous events meant that the leases lacked commercial or practical coherence. Without the term, the risk is shouldered by the tenant but the court noted that there is no good commercial reason why the loss should necessarily be borne by the landlord in circumstances where it is a matter for negotiation between the parties as to where the risk should lie. The court also noted that it had been open to the tenant to take out business interruption insurance to guard against the risk of unforeseen events preventing the tenant from carrying on business (a point made by the court in the earlier case of New York Mellon v Sports Direct (and others) as well).
    • The court did not accept that the proposed terms were so obvious that they go without saying - the landlord gave no warranty that the premises could lawfully be used as a cinema, and the leases expressly set out the circumstances in which rent would be suspended, with the result that it is not obvious that a further term should be implied to provide for a suspension of rent in other circumstances that the parties did not think about and which were not covered by the leases.

2. Failure of basis

  • The defendants also argued that there had been a partial failure of consideration (or failure of basis) for the leases: what they bargained for was the use of the premises as a cinema, this was the state of affairs on which the leases had been premised and so no payments were due for the periods when this state of affairs failed.
  • Failure of basis is a concept which is relevant to a claim in unjust enrichment, and although the defendants did not make a claim for restitution based on unjust enrichment as a result of failure of basis, they argued that if they were able to make such a claim had the rent and services charges been paid, this should provide a defence to having to make the payments in the first place.
  • Generally speaking, where there is a contract between the parties relating to the benefit transferred, there can be no claim in unjust enrichment while the contract is subsisting as the law should give effect to the parties’ own allocation of risk and valuations as expressed in the contract. There is an exception to this general rule where it would be neither inconsistent with the terms of the contract nor interfere with the contractual allocation of risk between the parties.
  • The court rejected the argument that there had been a failure of basis in this case. Although it was accepted that it is clear from the terms of the leases that the parties expected that the premises would be used as a cinema, the court did not agree that the use of the premises as a cinema is “fundamental to the basis” on which the parties entered into the leases. In reaching its conclusion, the court took into account the specific terms of the leases and the allocation of risk between the parties, noting that the leases provided for both (i) the risk of the premises being unfit for use as a result of an “Insured Risk” (which did not include the pandemic), with the landlord being required to take out insurance against such risks which is then paid for by the tenant, and (ii) the possibility that the premises cannot lawfully be used as a cinema (the landlord gave no warranty that the premises could be used as such). The court held that a failure of basis in this case would interfere with the allocation of risk agreed by the parties and be inconsistent with the terms of the leases.

The decision is good news for landlords and reinforces the Government’s message that businesses should pay rent where they are able to do so. It is notable that the defendants relied on the fact that the Government has proposed to introduce a binding arbitration process to deal with rent arrears relating to periods of closure as a reason why the claim should not be dealt with on a summary basis and should go to trial (having previously argued, unsuccessfully, that the summary judgment hearing should be adjourned for the same reason). The court rejected this, deciding that this was not a compelling reason for the case to go to trial.

We previously wrote about the uncertainty surrounding the proposed arbitration process and how it will work in practice (see our previous article: Restrictions, ringfencing and recovery: extended tenant protections announced by government). Details of the process are still awaited but it remains clear, for now at least, that commercial landlords do have the right to commence court proceedings against a tenant to recover unpaid rent.

Tags

real estate, litigation, restructuring and insolvency, reid

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