Coronavirus and non-payment of rent – how much protection does a tenant have?

In the recent High Court case of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2021] EWHC 2591 (Ch) (London Trocadero) the tenant challenged and tested this provision and put forward some novel arguments to say that rent should not be payable during a period of COVID-19 closure.

Did the tenant succeed?

No – the case confirmed the principle that whilst the CA 2020 suspends a landlord’s ability to forfeit a lease during the suspension period  it does not prevent rent and other sums due under the lease from accruing. The tenant’s obligation to pay these sums (together with interest) remains.

In the London Trocadero case the High Court granted a landlord summary judgment for rent and service charge arrears for periods when the COVID-19 pandemic meant the premises could not be used for the permitted use under the lease (as a cinema). The court rejected the tenants’ defences that there should be implied terms that they were not liable to pay for periods when the premises could not be used, and that there was failure of basis.

The brief facts of the case were: the tenant held two leases of a cinema premises in the Trocadero Centre in London. The leases provided that the property could only be used as a cinema. The landlord did not warrant that the property could be lawfully used as such.

During the pandemic, regulations required the cinema to close for certain periods. During those times, the tenant could not trade at all. In the gaps between those restrictions, the trading conditions were so poor in Central London that the cinema largely remained closed. When it did open, its takings were much lower than they would have been in normal circumstances.

The tenant had not paid any rent since June 2020. The landlord sought summary judgment for arrears of rent and service charge of £2.9 million.

The issues reviewed in that case (and arguments put forward by the tenant and to support the claim that the tenant should not be liable for rent) were:

• Whether there should be a term implied into the lease that suspended the obligation to pay rent and service charge during a period where to operate that premises would have been illegal.

• Whether there had been a failure of consideration (the payments were for the use of the premises as a cinema and so no payments were due for periods when the premises could not be used as a cinema).

The High Court rejected both arguments, finding that:

• The proposed implied terms did not meet the business efficacy test or the obviousness test and were also inconsistent with the terms of the leases. The issue of liability was one of risk which was a matter of negotiation. The lease contained rent suspension provisions that applied in certain circumstances and this indicated that the risk of not being able to use the premises for any other circumstance lay with the tenant, who could have taken out business interruption insurance (it being agreed that closure due to the COVID-19 pandemic was not an “insured risk” under the lease, so the rent suspension provisions in the lease did not apply).

• There was no failure of consideration. Taking account of 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. The continued and uninterrupted lawful use of the premises as a cinema was simply an expectation which motivated them to enter into the leases. In addition, the leases addressed the possibility that the premises could not lawfully be used as a cinema and allocated the risk to the tenant.

Blake Morgan comment

As the end of the ban on forfeiture for non-payment of rent approaches, tenants have been looking for arguments to escape liability for rent debt accrued during the pandemic. So far, these arguments seem to have failed even where premises were required to be closed by the COVID-19 restrictions.

Potentially the last hope for tenants is a proposed arbitration scheme that was initially raised in a UK Government press release issued on 16 June 2021. The UK Government stated that primary legislation will be introduced that will “ringfence” rent arrears that have built up in specific periods in which a business has had to remain closed during the pandemic. Landlords and tenants will be required to come to an agreement on the treatment of those ringfenced arrears, for example, waiving some of the amount due or agreeing a longer-term repayment plan. If agreement cannot be reached, a binding arbitration process will be put in place that ensures a legally binding agreement is made to which both parties must adhere. It is not yet known what effect such a binding agreement imposed by the proposed arbitration process will have on the landlord’s ability to forfeit a lease for non-payment of the ringfenced rent.