Court of Appeal – Dismisses Tenant COVID rent challenge.
04 August 2022
Last month, the Court of Appeal in England and Wales in the case of Bank of New York Mellon (International) Ltd and another v Cine-UK Ltd and London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others  EWCA Civ 1021 dismissed a combined appeal by two tenant cinema operators against summary judgments in favour of each landlord at first hearing, confirming the landlords were entitled to all rent arrears during the periods when the cinemas could not operate due to COVID restriction.
In our local market, the recent periods of lockdown had a direct impact on activity in the Commercial Leasing sector and led to a flurry of activity; particularly in retail with many negotiating variations to provide effective pauses of leases affected by COVID (and typically factoring in either an extension of the lease term or a re-gearing of rent post-pause to ensure the landlord was not significantly out of pocket). The recent decision of the Court of Appeal confirms that seeking a COVID variation (if available) was a sensible approach and restates the long held principle that “Contract is King” and terms will not be easily implied into a fairly negotiated contract.
In summary, the Court of Appeal decision found:
- None of the implied terms the tenants sought satisfied a business efficacy test - ‘the contract would not make business sense without them’ or the ‘obvious test’ – i.e. it is so obvious, it is implied without stating.
- Both leases worked without the requested implied terms and allocated to the tenant the risk that the premises could not be used for their intended purpose.
- The fact that the pandemic restrictions could be argued as being unprecedented was not a reason to disregard or dis-apply principles of contract law or to enhance the law of unjust enrichment.
- The leases contained considered circumstances in which the obligation to pay rent would be suspended and allocating risk. The attempted ‘failure of basis’ claim (i.e. no use could be made of the premises for which rent was due) contradicted the negotiated lease provisions.
- The correct interpretation of the rent suspension clause in the Bank of New York Mellon lease required physical damage to have occurred and it did not include non-physical, financial damage of the type caused by the pandemic restrictions.
The complete lockdown of retail or entertainment venues due to COVID 19 is hopefully something that will not be repeated, but the risk does not appear possible of being ruled out and increasingly there does appear to be a trend of tenants seeking a “Pandemic Rent Suspension” clause generally for new leases. Provided this permits a landlord to still achieve the full expected return of the commercial terms agreed at Heads of Terms stage, this would appear to us to be a sensible approach.
In addition to this Court of Appeal clarification, it is worth noting the two year COVID 19 moratorium on the ability for Landlords to bring forfeiture proceedings against business tenants in Northern Ireland ended (in line with the rest of the UK) on 25 March 2022.
The local and UK governments still recommend that landlord and tenants seek to negotiate settlements and consider the UK Code of Practice for Commercial Property Relationships following the Covid-19 Pandemic. Commercial rent code of practice following the COVID-19 pandemic - GOV.UK (www.gov.uk)
*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.