The recovery of rent arrears: third victory for landlords, but will it continue?

Whilst there is a feeling of ‘back to normal’ in the air, many tenants (and particularly those in the hospitality and entertainment sectors which were hit particularly hard by the pandemic), are still recovering from the financial losses sustained during the government-imposed lockdowns which commenced in March 2020.  

Summary of the current position

While many landlords and tenants have negotiated agreements in relation to the sums due to be paid during periods of lockdown, this is not always the case, and some landlords remain significantly out of pocket. However, tenants remain protected from their landlord’s most draconian remedy in this scenario – forfeiture of the lease – with this restriction not scheduled to be lifted by the government until 25 March 2022.

In the meantime, the government confirmed in a policy statement that it intends to legislate to ringfence debt accrued during the pandemic by businesses affected by enforced closures, and that it will set out a process of binding arbitration to be undertaken between landlords and tenants. This policy statement was released on 4 August 2021, but legislation has not yet been released, and it remains unclear how exactly the binding arbitration mechanism will work in practice. We await a further update from the government but the court recently confirmed that as far as rent arrears recovery is concerned, the ball very much remains in the landlord’s court. 

Facts

In the recent case of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2021],  the Claimant, London Trocadero (2015) LLP, issued proceedings against its tenant, Picturehouse Cinemas Limited, seeking to recover unpaid rent and service charges which had not been paid since June 2020. The tenant had two leases, both of which included a guarantor, Cineworld Limited, (the Second Defendant in the proceedings), who guaranteed the tenant’s performance of its obligations under its leases.

The landlord commenced its claim on 22 October 2020, when the amount due to it was approximately £1.5million. The tenant defended the claim, with its defence largely being founded on the premise that they should not be liable for the arrears during the periods when the premises could not be used as a cinema. The tenant argued the following:

1. that a term should be implied into the leases so that payment of rent and service charges should be suspended during any period where use of the cinema would have been illegal and/or during which attendance would have been lower than anticipated at the date of grant of the leases;
2. that there had been a ‘failure of basis’ as the payments due under the leases were for the use of the premises as a cinema, and therefore no payments were due for periods when the premises could not be used as a cinema; and
3. that the tenant was entitled to set-off its counterclaim for insurance issues. In advancing this argument, the tenant relied on wording which is commonly found in leases which requires rent to be paid "without any deduction whatsoever". 

The tenant and guarantor included a counterclaim for the rent paid on 31 March 2020 which they claimed was paid by mistake of law, and also for damages which it alleged related to overpaid insurance sums referred to at clause 3 above. In January 2021 the landlord amended its claim to include further amounts which had fallen due, and applied for summary judgment. In July 2021, the landlord amended its claim further, which brought the claim against the tenants to £2.9 million.

The court’s response:

At the hearing, the court considered the tenant’s defences mentioned above and drew the following conclusions (which are addressed using the same numbering):

1. The court first considered whether the terms the tenant sought to implied were so obvious that they went without saying, or were necessary to give the leases business efficacy.  It held that they neither applied. In the court’s view, the temporary inability of the tenant to put the premises to the permitted use and the reduced turnover as a result were part of the balance of risk under the leases. However there was no obvious reason why the risk of Covid or similar risk should be allocated to the landlord, and leading on from this, the fact that the risk was left with the tenant did not lead to a conclusion that the leases lacked commercial or practical coherence. In reaching this conclusion, the court noted that the landlord gave no warranty as to the lawful use of the premises as a cinema, and there was no covenant not to use the premises for any other purpose.  In addition, the leases expressly provided for rent to be suspended in certain circumstances (e.g. insured damage), and this indicated that the risk of not being able to use the property in other circumstances lay with the tenant (who could have taken out its own business interruption insurance), meaning that no further term should be implied.
2. In terms of the failure of basis defence, the court considered that in order to succeed, there must be a total rather than a partial failure of basis.  Here, the tenant had been able to use the premises for the majority of the term of the leases (irrespective of the fact that trading performance during the periods the cinema could open was so poor that it was for this reason the cinema largely remained closed). In the court's view, there was no failure of basis because the use of the premises as a cinema was not "fundamental to the basis" on which the parties entered into the leases.  The court considered that there could be no general rule and each case would depend on its own facts. 
3. The court held that the tenant did have a right of set-off in relation to its counterclaim for insurance issues. 

In addition to the above, and as part of determining the landlord’s summary judgment application, the court considered the proposal of the government to introduce a binding arbitration scheme and a possible uncertainty as to the amount of the counterclaim in respect of insurance issues.  They rejected both as compelling reasons to go to trial, and thus awarded the landlord summary judgment in full, subject to a reduction of £621,000 against the Defendants which related to the tenant’s counterclaim in relation to insurance issues. In doing so, the court confirmed that they considered the tenant’s arguments had no real prospect of success.

Decision and comment

This is the third case this year where the arguments advanced by the tenant to avoid paying rent during the pandemic have failed. The decision will be welcomed by landlords, and will serve as a stark reminder for tenants who have been unable or unwilling to reach an agreement with their landlord regarding payments due whilst they were unable to trade during the pandemic.

That being said, and given the protective measures the government put in place for tenants, the outcome of these cases certainly gives food for thought. It is therefore perhaps not surprising to hear that Cine-UK Ltd (a member of the Cineworld group) which was the tenant in the first case which addressed this issue (Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] EWHC 1013) has been successfully granted permission to appeal. We have now heard that Picturehouse Cinemas Ltd and Cineword Limited have also been granted permission to appeal, and that these cases (which are expected to address the same points of law), are likely to be heard together. We therefore await the Court of Appeal’s view in the coming months.

For more information on the above, please contact Emma Preece or your usual Charles Russell Speechlys contact.