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London Trocadero v Picturehouse Cinemas: a refusal to be swayed from established legal principles to accommodate difficulties faced during the Covid-19 pandemic

London Trocadero v Picturehouse Cinemas: a refusal to be swayed from established legal principles to accommodate difficulties faced during the Covid-19 pandemic

Overview

The High Court decision in London Trocadero (2015) LP v Picturehouse Cinemas Ltd [2021] EWHC 2591 (Ch) represents the latest in a growing line of cases arising out of the Covid-19 pandemic in which the courts have refused to be swayed from established legal principles to accommodate difficulties faced by contractual counterparties, and commercial tenants in particular. Here, the court refused to imply a term into two leases excusing the tenants from the payment of rent and service charges, or accept that there had been a failure of basis, in circumstances where it had at various points during the pandemic been either illegal or unviable for the tenants to use the leased premises.

The court granted summary judgment to the landlord of commercial premises in a claim for rent arrears and service charges which had fallen due over the course of the pandemic, despite the tenants having been unable to use the premises in question at various points because it would have been either illegal or unviable to do so.  In previous cases in this area, tenants have largely sought (unsuccessfully) to excuse themselves from contractual performance on the basis of frustration or prior breach of contract by the landlord.  Here, the tenants' arguments were based on alleged implied terms excusing them from payment in the circumstances, and an alleged failure of consideration / failure of basis.  However, those arguments were equally unsuccessful.

The tenants have been granted permission to appeal the decision, together with a stay on enforcement of the judgment pending the appeal. Landlords and tenants alike will now be watching to see whether the Court of Appeal is more amenable than the High Court has been thus far to legal arguments advanced by tenants to the effect that they should be excused from their payment obligations on account of the pandemic.

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Background

The claimant was a landlord of cinema premises at the Trocadero Centre in London. The defendants were tenants who had leased the cinema premises and guarantors who had guaranteed sums due under the leases.

The landlord sought to recover rent and service charge payments, in the region of £2.9 million, which were owing since June 2020 (up to July 2021). The tenants argued that they were not liable for charges that had arisen during that period because it was either unlawful, or unviable, to use the premises as a cinema due to government mandated Covid-19 restrictions. The court accepted that it had been unlawful or unviable for the tenants to operate the premises as a cinema for the relevant period. There was no dispute in relation to the facts.

The landlord applied for summary judgment against the tenants and the tenants sought to resist the application on the grounds that:

1) Terms ought to be implied into the leases to the effect that the tenants' obligations to pay rent and service charges would be suspended in the event that it became unlawful or unviable to operate the premises as a cinema; and/or

2) There had been a failure of consideration / failure of basis in relation to the period when the premises could not be used as a cinema. 

The decision

The court found that the tenants had no real prospect of successfully defending the claims against them and granted summary judgment to the landlord.

In relation to the issue of implied terms, the court reiterated that the default position is that nothing should be implied into a contract. The more detailed and apparently complete the contract, the stronger that presumption is. To satisfy the test for implying a term, that term needs to either be so obvious as to go without saying or be necessary to give the contract business efficacy. The court concluded that it was not obvious that a term should be included in the leases to the effect that the tenants should be released from their payment obligations. This was particularly so given that an express term of the lease stated that no "covenant, warranty or representation [was being given by the landlord] that the demised premises can lawfully be used for the Permitted Use [i.e. as a cinema]". The necessity test is also a stringent one and, as Lord Neuberger made clear in Marks & Spencer Plc v BNP Paribas Securities Services [2016] AC 742, a term will only be implied if “without the term, the contract would lack commercial or practical coherence”.  The court concluded that the fact that the tenants were required to continue paying rent and service charges in the circumstances did not deprive the leases of business efficacy. There was no good commercial reason why the loss occasioned by the pandemic should necessarily be borne by the landlord. The tenants' arguments on implied terms therefore failed.

The court then considered the issue of failure of consideration, otherwise known as failure of basis, as the foundation for a restitutionary claim by the tenants. A failure of consideration or failure of basis can involve the failure of a promised counter-performance but also the failure of a state of affairs on which the agreement was premised (hence the term a "failure of basis"). The tenants' argument was essentially that the ability to operate the premises as a cinema was a state of affairs on which the agreement was based. The court ruled that, although a claim in unjust enrichment resulting from a failure of basis can, in principle, exist, in this case the use of the premises as a cinema was not fundamental to the basis on which the parties had entered into the leases. It was simply an expectation which motivated them to do so. A claim in unjust enrichment for a failure of basis will not usually succeed where a contract is subsisting. This is because the law of unjust enrichment should not be used to overturn the parties' own allocation of risk as expressed in the contract. The court was influenced in this case by the fact that the parties had expressly dealt, in the leases, with other situations in which the premises could not be used as a cinema and had passed the burden of the associated risks to the tenants (as the party responsible for paying the insurance). As such, a finding of a failure of basis would have undermined the allocation of risk that had been agreed between the parties.

There must be a total, as opposed to a partial, failure of basis for a claim in unjust enrichment to be successful. The courts have, however, been willing to accept that contracts can be divisible into separate parts and, so long as there is a total failure of basis in relation to a severable part, the claim for recovery can succeed. In this case, the court was prepared to accept that, had there in fact been a failure of basis, there would have been a total failure of basis in relation to the severable parts of the leases comprising the periods during which the premises could not be used as a cinema.

Key takeaways

This case involved unsuccessful attempts by commercial tenants to avoid payment of rent and service charges, in the context of the COVID-19 pandemic, on the grounds of implied terms and failure of basis. Tenants in similar cases have sought to excuse themselves from contractual performance on the basis of frustration or prior breach by the landlord, but have been equally unsuccessful. It is worth noting, on the issue of frustration, that the court in Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] EWHC 1013 (QB) rejected the tenants' argument that their leases had been "temporarily frustrated" during the periods in which the relevant premises were forced to close. The court made clear that the doctrine of frustration only applies where performance under the contract has become so "radically different" to what was contemplated that it would be unjust to hold the parties to their bargain; and the result is to discharge the contract completely such that it cannot be revived. In short, the bar to establishing frustration is high, much like the threshold for implying terms into a contract and demonstrating a failure of basis.

The growing body of case law in this area collectively demonstrates a clear signal from the judiciary that they are not prepared to depart from, or indeed relax or develop, established legal principles in order to accommodate the unfortunate circumstances individuals and businesses find themselves in as a result of the pandemic. It is difficult to imagine what, if any, arguments remain available to tenants seeking to resist rent payments on account of the pandemic. It is, however, entirely possible that the Court of Appeal will take a different approach to these issues.

A few key takeaways:
  • In order to protect against similar situations, and achieve greater certainty, parties should seek to include specific force majeure clauses in their contracts which set out what is to happen in the event of unexpected events. Such a term could make clear that the parties' obligations will be temporary suspended in particular circumstances. As ever with force majeure, much will turn on the precise wording of the provision, so it is essential to ensure that such clauses are formulated carefully and properly reflect the intentions of the parties.

  • If you are acting for a defendant seeking to rely on failure of basis, it is important to bear in mind that it cannot be used as a means of defending a contractual claim and can only take the form of a separate claim for restitution in respect of sums that have been paid. It is therefore essential to plead such matters by way of a counterclaim in unjust enrichment.

  • The Commercial Rent (Coronavirus) Bill was introduced in parliament on 9 November 2021 and the government aims to pass the bill by the end of March 2022. The Bill is intended to facilitate the resolution of disputes over rent arrears incurred in periods of mandated closure during the pandemic. A binding arbitration process is set to be introduced for situations where landlords and tenants are unable to reach agreement. The best course of action for tenants who are currently in dispute with their landlords will likely be to seek a stay pending the coming into effect of the Bill as it may well result in the reduction of tenants' rent arrears or extended periods for the payment of those rent arrears. You can read more about the bill and the proposed measures here.

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