The High Court has granted summary judgment to the landlord of commercial premises in a claim for arrears of rent and service charges due since the outbreak of the Covid-19 pandemic: London Trocadero (2015) LP v Picturehouse Cinemas Ltd [2021] EWHC 2591 (Ch).

This case is another example of the court’s approach to applying legal principles in the context of disruption to commercial arrangements caused by the Covid-19 pandemic. However, in contrast to previous cases where claims to be excused from contractual performance have been based primarily on force majeure or frustration (see for example here, here and here), the tenant’s arguments were based on alleged implied terms and a total failure of consideration (or “failure of basis” as it is now called).

In the present case, while acknowledging that for certain periods it was unlawful to operate the premises as a cinema due to Covid restrictions, and for others it was uneconomic to do so, the court found that there was no real prospect of the tenants establishing that terms should be implied to the effect that the payment obligations under the leases were suspended during those periods. Nor was there any real prospect of establishing that there had, in the circumstances, been a failure of basis. As such, the defendants could not avoid paying rent for the affected period.

However, and whilst the argument ultimately failed in this case, the court acknowledged that it may be possible for a party to pursue a claim for unjust enrichment for rent paid in circumstances where: (i) the use of the premises in a specified way was a foundation of the leases, ie where it was fundamental to the basis on which the parties entered into the leases rather than simply an expectation which motivated them to do so; and (ii) that use was unavailable for a specified period of time (the court having found that it was reasonably arguable that the leases could be severed on a time basis, so that there could be a total failure of basis in respect of a severable part of the leases).

There would seem to be no reason in principle why such arguments should be limited to leases, and therefore it may be possible for a party to succeed in a claim for unjust enrichment in other contexts where it has been unable to enjoy a foundational benefit under a contract, even for a limited time. However, it is clear that such instances are likely to be rare. Further, the court in the present case took the view that, while a claim could be brought for restitution of sums paid due to a failure of basis, it did not accept that failure of basis could provide a defence to a contractual claim for payment. This would, in the court’s view, be tantamount to creating a doctrine of temporary or partial frustration, which the courts have rejected in previous cases.

Of course, in order to achieve greater certainty, parties can include a force majeure clause in their contract setting out what is to happen if unexpected events intervene – providing, for example, for obligations to be temporarily suspended if performance is prevented by specified types of occurrence.

Background

The claimant is the landlord under two leases for cinema premises in central London. The defendants are the tenants under the leases and the guarantor of sums due under them.

The landlord sought to recover rent arrears (and service charges) said to be owed under the leases, amounting to in the region of £2.9 million, in respect of the period between June 2020 and July 2021. The defendants argued that they were not liable for rent and service charges which had arisen in periods when the premises either could not lawfully be used as a cinema, or it was uneconomic to do so, due to government-imposed Covid-19 restrictions. The defendants also counterclaimed for rent said to be paid under a mistake of law, and for damages for alleged overcharging by the landlord in respect of amounts relating to insurance.

The landlord applied for summary judgment in relation to its claim for arrears and the defendants’ counterclaim for amounts paid under a mistake of law. The counterclaim in relation to insurance payments was to be dealt with at a separate trial.

The defence to the landlord’s claim was pleaded on three bases:

  1. Terms should be implied into the leases providing, in essence, that the obligation to pay rent and service charge would be suspended if the operation of the cinemas became illegal, or any regulations resulted in the attendance dropping to a level below that which the parties would have anticipated.
  2. There had been a total failure of consideration, or “failure of basis”, in relation to a severable or divisible part of the lease (the leases being severable on a time apportionment basis) for the periods during which the premises could not be used as a cinema.
  3. The defendants were entitled to a set-off in equity in respect of their counterclaim in relation to insurance payments.

Decision

The High Court (Robin Vos sitting as a deputy High Court judge) found that the defendants had no real prospect of defending the claim based on implied terms or failure of basis. The court found that there was a right to set off any amounts due under the counterclaim relating to insurance overcharging, but it was accepted that this would be a maximum deduction of £621,000.

This post addresses only the aspects of the decision relating to the defendants’ arguments based on implied terms and failure of basis.

Implied terms

The judge noted that, in considering whether terms should be implied into a contract, the starting point is whether such terms are so obvious that they go without saying or they are necessary to give the leases business efficacy.

In considering the necessity test, the judge referred to the recent judgments in Yoo Design Services Ltd v Iliv Realty Pte Ltd [2021] EWCA Civ 560 where Carr LJ noted that “the test is one of necessity, not reasonableness. That is a stringent test” and Marks & Spencer Plc v BNP Paribas Securities Services [2016] AC 742 where Lord Neuberger noted that a term will only be implied if “without the term, the contract would lack commercial or practical coherence”. Applying this test, the judge found that the fact that the tenants had to pay rent even though the premises could not be used for the intended purpose as a result of unforeseen events did not deprive the leases of business efficacy.

As to the obviousness test, the judge referred to a clause in the leases which confirmed that there was “no covenant warranty or representation that the demised premises can lawfully be used for the Permitted Use”. He found that, given the existence of such wording, it simply could not be said that it was obvious that the tenants should be excused from paying rent for any period when the premises could not be used. The inclusion of a provision for the suspension of rent if the premises could not be used as a result of being damaged by an Insured Risk (as defined in the leases) also inevitably led to the conclusion that it was not obvious that a further term should be implied.

Failure of basis

The judge referred to Barnes v Eastenders Group [2014] UKSC 26, in which Lord Toulson explained the reason for using the term “failure of basis” rather than the more familiar “failure of consideration”:

“Failure of basis, or failure of consideration as it has been generally called, does not necessarily require failure of a promised counter-performance; it may consist of the failure of a state of affairs on which the agreement was premised.”

The essence of the defence in this case was that the ability to operate the premises as a cinema was a state of affairs on which the agreement was premised.

In assessing the defence, the judge highlighted three issues that needed to be considered:

  1. whether there had in fact been a failure of basis;
  2. if so, whether the failure of basis related to a severable part of the lease; and
  3. if both of these hurdles were overcome, whether the failure of basis was a defence to the landlord’s contractual claim.

The judge noted that, in general, a claim in unjust enrichment cannot succeed where there is a subsisting contract. However, following the recent Court of Appeal decision in Dargamo Holdings Ltd v Avonwick Holding Ltd [2021] EWCA Civ 1149, it must now be accepted that a claim in unjust enrichment as a result of a failure of basis can exist even where there is a subsisting contract, but this can only apply where: (i) it would not be inconsistent with the terms of the contract; and (ii) it did not interfere with the contractual allocation of risk between the parties.

The judge found that, taking into account the terms of the leases, the use of the premises as a cinema was not “fundamental to the basis” on which the parties entered into the leases in this case; it was simply an expectation which motivated the parties to enter into the leases. Further, the leases dealt with other circumstances in which the premises could not be used as a cinema, for example due to damage caused by Insured Risks, and passed the burden of those risks onto the defendants. The suggested failure of basis would therefore interfere with the agreed allocation of risk between the parties as well as being inconsistent with the terms of the leases.

As such, the judge found that the defendants had no real prospect of successfully arguing that there had been a failure of basis.

Interestingly, the judge noted that, if he had found there to be a failure of basis, he would have found (subject to the severability point below) that it was a total failure of basis, despite the tenants’ continued possession of the premises. That was because, if the use of the premises as a cinema was indeed fundamental to the basis of the leases, simply having possession but being unable to use the premises as a cinema would not provide the tenant with any part of the essential bargain contracted for.

As to severability, the judge said that if he had found there had been a failure of basis, there seemed to be “no reason in principle why the periods during which the premises could not be used as a cinema should not be treated as a severable part of the leases and the rent apportioned accordingly”. He would therefore have concluded that the defendants had a realistic prospect of success in relation to this part of their defence.

Finally, as to whether a failure of basis could provide a defence to the landlord’s contractual claim, as opposed to founding a claim for unjust enrichment in respect of sums paid, the judge’s view was that that it could not, though he noted that the defendants had not made detailed submissions on the point. He commented: “Allowing failure of basis as a self-standing concept to provide a defence to a contractual claim would be tantamount to extending the doctrine of frustration so as to allow obligations under a contract to be suspended as a result of what might be termed temporary or partial frustration”. The concept of temporary frustration had been rejected in Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] EWHC 1013 (QB) (considered here), which involved a party who was part of the Cineworld Group (as were the defendants in the current case).

As the judge put it, given the distinction between the law of unjust enrichment and the law of contract, it would not be right as a matter of principle for the courts to extend the reach of failure of basis (a concept which might give rise to a claim in unjust enrichment), so that it provides a direct defence to a contractual claim in circumstances where the contract remains in existence.

The judge went on to note that a potential pragmatic solution where failure of basis is put forward as a defence to a contractual claim is for it to be pleaded by way of counterclaim in unjust enrichment and set-off, although he expressed no concluded view on the matter.