Is Covid a viable defence by commercial tenants for rent arrears? No, says the Court of Appeal!

The Court of Appeal has recently found that a tenant cannot use Covid as a defence for rent arrears. The case acts as an important case study for rent arrears accrued during the pandemic as well as dispute resolution between commercial landlords and tenants.

 

The cases in question were as follows, Bank of New York Mellon (International) Limited v Cine-UK Limited and London Trocadero (2015) LLP v Picturehouse Cinemas Limited & ors. These appeals were made in the Court of Appeal by the cinema operators to quash the summary judgment in the first hearing that entitled the landlords to all rent arrears payments.

 

Keep reading to learn more about the case.

Background

 

As we all know, the lockdowns precipitated by the Covid-19 pandemic had a disastrous impact on economies across the world, affecting businesses and individuals alike. One of the types of business perhaps most affected by the pandemic were cinemas – with the activity of sitting in a room of people for hours lending itself particularly well to a virus which spreads extremely well in poorly ventilated areas.

 

The lockdowns which subsequently came in and justifiably meant that cinemas were not allowed to legally operate resulted in a considerable decrease in revenue which ran concurrently with the reality that cinemas had to continue to pay rent to their landlords. This is the topic of contention in this jointly held case.

 

Businesses from other industries have also attempted to use the pandemic as reason to avoid paying rent that was due during the pandemic, with the property fund manager First Property Group recently winning half a million pounds in rent arrears from the operators of jewellers H. Samuel and Ernest Jones.

 

The government acted on the considerable level of dispute over rent arrears which accrued during the pandemic by passing the Commercial Rent (Coronavirus) Act 2022. This made provision for the enabling of rent debt relief in certain circumstances where business tenancies were adversely affected by coronavirus. This was to be made possible through arbitration.

 

The landlords in the respective cases were Bank of New York Mellon, which operates a cinema complex situated in a shopping centre in Bristol (Cine-UK), and London Trocadero, which operates a cinema complex in Piccadilly, London(Picturehouse).

 

The case

 

The tenants, Cine-UK and Picturehouse Cinemas, which are both part of the Cineworld Group, filed their appeals in late 2021, after they had been allowed to open following the end of restrictions on cinemas.

 

Cine-UK’s premises were only open for business for a very short window between March 2020 and May 2021, when they finally opened again for good. However, it wasn’t until July 2021 that cinemas were finally able to reopen unrestricted. This was also the case for the Picturehouse cinema, which was only open for about 2 months between March 2020 and May 2021.

 

Both tenants objected to the payment of rent during this period for two main reasons. Their arguments for this were as follows:

 

• The Government restrictions imposed due to the pandemic had given them the right to seek relief from their obligation to pay rent during this period
• It was an implied term of the agreement that should the tenant not be able to lawfully use their premises as a cinema, then they should be relieved of their obligation to pay rent.

 

Cine-UK made a third argument in the case of Bank of New York vs Cine-UK. They claimed that the phrase ‘damage or destruction’ was pertaining to non-physical damage in the form of the effect which the Covid pandemic had on the business, rather than purely physical damage or destruction.

 

Judgements

 

All of the arguments made by the tenants were rejected by the Court of Appeal.

 

With the first argument, which focused on failure of basis, the judge observed that it was “difficult to argue that the landlord had been unjustly enriched in circumstances where the rent had not been paid”.

 

The second argument, concerning implied terms of the agreement, was dismissed by the Court as the ‘leases worked well without the need for implied terms to be read into them’.

 

For the other argument which was made by Cine-UK, the judge ruled that the landlord’s argument that “damage and destruction” was limited to physical damage and destruction was correct. Cine-UK had attempted to construe the term “damage and destruction” as not being solely physical, meaning that the enforced lockdowns could come under this description as well.

 

Our thoughts

 

While these businesses clearly struggled during the pandemic as a result of not being able to open and legally operate, this was also the case for businesses up and down the country, many of which were much smaller in size than Cine-UK and Picturehouse.

 

The outcome of this case will bring much more certainty to commercial landlords, as it confirms their right to enforce against long-standing rent arrears which are not subject to mandatory arbitration. As a result, making an exception for these businesses does not seem justified, and the decision made by the judge in the Court of Appeal therefore seems to be the right one.

 

It may subsequently result in commercial tenants favouring the arbitration route in future, for which they have until 23^rd September 2022 when the scheme closes.

 

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