On 27 July 2022, the Court of Appeal handed down its judgment on the conjoined appeals of Bank of New York Mellon (International) Limited v Cine-UK Limited and London Trocadero (2015) LLP v Picturehouse Cinemas Limited and others  EWCA Civ 1021. These appeals considered whether a tenant is able to rely on a ‘Covid defence’ against a landlord’s claim for rent arrears that accrued during the pandemic.
The facts of each case were relatively straightforward. The tenants failed to make consecutive, quarterly rent payments at times when they were unable to operate their cinemas, as a result of Government restrictions, during the coronavirus pandemic. The landlords issued court proceedings to recover this rent as a debt. The landlords applied for summary judgment in these proceedings, and were successful at first instance. (For the first instance judgments, see: Bank of New York Mellon (International) Limited v Cine-UK Limited  EWHC 1013 (QB) and London Trocadero (2015) LLP v Picturehouse Cinemas Limited and others  EWHC 2591 (Ch).)
Each tenant was granted permission to appeal, and the appeals were conjoined, as the appellants were members of the same corporate group. At appeal, the tenants argued that they were not under an obligation to pay rent in periods where operation of their cinemas was unlawful. The grounds of their appeals were as follows:
- the “basis” of the leases was that the premises would be capable of lawful use as a cinema. As the Government regulations made it illegal for the premises to be used for that purpose, there was therefore a “failure of basis”, relieving the tenant of their obligation to pay rent for the relevant periods. The tenants also argued that they had a claim in unjust enrichment for any sums paid during these periods;
- it was an implied term of the leases that the tenant should be relieved of its obligation to pay rent where the tenant could not lawfully use the premises as a cinema; and
- (in the Bank of New York Mellon appeal only) the tenant argued that it was relieved from its obligation to pay rent by the rent cesser clause in the lease, which was linked to the landlord’s obligation to obtain insurance against non-payment of rent as a result of pandemics (as well as other risks).
The Court of Appeal dismissed both appeals in their entirety.
On the first ground, the Court rejected the tenants’ argument that its obligation to pay rent was based on the assumption that the property could lawfully be used as a cinema. Such an argument was inconsistent, they said, with the express terms of each lease and way in which risk had been expressly allocated between the parties. Similarly, any claim for unjust enrichment could not contradict the terms of the contract, and would only be permissible where there was a “gap” in the contract (as set out in Dargamo Holdings Limited v Avonwick Holding Limited  EWCA Civ 1149). As there was no such gap in the present leases, there could be no claim for unjust enrichment.
On the second ground, the Court held that the implied term failed both the “business efficacy” test and the “obviousness” test. On the first test, the Court found that both leases worked perfectly well without the proposed implied term, and had, in fact, allocated the risk that the premises could not be used for their intended purpose to the tenant. On the second test, the Court held that the implied term must be so obvious as to go without saying; however, given that to imply the proposed term into the lease would alter the bargain struck between the parties, by extension, it could not be obvious.
The Court swiftly rejected the third ground of appeal and agreed with the Master at first instance. The rent cesser clause only concerned itself with physical damage or destruction caused by the insured risks. In addition, the landlord’s insurance did not cover loss of rent where the tenant chose not to pay (rather, only where the tenant is legally not required to pay).
In dismissing these appeals, the Court has made clear that a ‘Covid defence’ does not exist in relation to a landlord’s claim for rent arrears accrued during the pandemic. It will be interesting to see if this results in a material increase in referrals to the arbitration scheme under the Commercial Rent (Coronavirus) Act 2022 (the “Act”). At the time of writing, there have only been three published awards under the Act. However, given the Court of Appeal’s latest judgment, the arbitration process probably now represents the only realistic means by which tenants can obtain relief from the payment of Covid-related rent arrears.
For a more detailed discussion of the Act, please see our earlier blog post here. Please note: the current deadline for referrals to the arbitration scheme is 24 September 2022 (although, given the notice requirements in the Act, the process must be initiated by 27 August 2022 at the latest).