Bank of New York Mellon v Cine-UK Limited and Picture House Cinemas Limited v London Trocadero (2015) LLP [2022] EWCA Civ 1021
The UK Government first announced the closure of all non-essential retail, leisure and hospitality venues and promulgated the Health Protection (Coronavirus, Business Closure) (England) Regulations 2020 in March 2020. These regulations were followed by a number of repeals and further regulations and then the enactment of the Coronavirus Act 2020.
Two years later, in March 2022, the mandatory arbitration scheme under the Commercial Rent (Coronavirus) Act 2022 (“CRAR”) was introduced. Just as the deadline for issuing a referral for arbitration under CRAR is fast approaching, the Court of Appeal has handed down judgment in the two appeals which determine the question of whether a tenant has a ‘Covid defence’ to a landlord’s claim for rent arrears: Bank of New York Mellon v Cine-UK Limited and Picture House Cinemas Limited v London Trocadero (2015) LLP [2022] EWCA Civ 1021.
Guy Fetherstonhaugh QC and Elizabeth Fitzgerald, instructed by Mishcon de Reya, acted for the successful landlords in Bank of New York Mellon v Cine-UK Limited.
Until CRAR, nothing the Government had legislated for in response to the pandemic altered the underlying legal relationship between landlord and tenant or the tenant’s obligation to pay rent. In many cases, even before the proposed mandatory arbitration scheme had been announced, commercial landlords and their tenants had reached a commercial accommodation. Settlement was not always possible however, and many landlords proceeded to issue debt claims and then claim summary judgment. Tenants sought to defend such claims, raising various inventive and sometimes unorthodox defences.
The first two reported Covid debt decisions given in April 2021, were the decisions of Master Dagnall, in the four combined claims in Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021] EWHC 1013 (QB) (“Bank of New York”), and Chief Master Marsh in Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863 (Ch) (“Commerz Real”). These were followed, in September 2021, by the decision of Robin Vos QC (sitting as a Deputy High Court Judge of the Chancery Division) in Picture House Cinemas Limited v London Trocadero (2015) LLP. The tenants’ various defences were rejected by all three judges, but in September 2021 Stewart J granted one of the tenants in Bank of New York permission to appeal to the Court of Appeal. In November 2021, the deputy Judge granted the tenant in Trocadero permission to appeal, with a view to the appeals being heard together (the tenants in both cases being companies in the same group).
The appeals were heard together on 21 and 22 June 2022 by the Chancellor, Sir Julian Flaux, Lord Justice Snowden and Sir Nicholas Patten. Both appeals were dismissed.
In both appeals the tenants sought to argue that in respect of the periods when it was unlawful to operate a cinema from the demised premises, the tenants were relieved from the obligation to pay rent for the following reasons:
- It was fundamental to the basis of the leases that the premises would be capable of lawful use. The effect of the Government regulations making it illegal to use the premises as a cinema caused a failure of that, basis and the tenants would therefore have a claim in unjust enrichment in respect of any rent or other sums paid in respect of the illegal periods. The tenants accepted that failure of basis could not operate as a substantive defence to the claim for rent under the lease, so sought to rely on a defence of set-off (“the failure of basis defence”).
- It was an implied term that tenant should be relieved of the obligation to pay rent where the tenant could not lawfully use the premises as a cinema (“the implied term defence”).
In Bank of New York Mellon, the tenant had an additional ground, namely that it was relieved from the obligation to pay upon a true construction of the rent cesser provision in the lease (“ the rent cesser defence”).
The Decisions at First Instance
In Bank of New York, the landlord had obtained insurance which extended, in principle, to losses arising from the events of the pandemic and the consequent effects on the various premises, including loss of rent. It was common ground that such loss became an “Insured Risk” within the meaning of the various leases, and that the tenants were obliged to pay an insurance rent comprising a proportion of the amount spent by the landlords on insurance. The tenants argued that they should be entitled to benefit from this insurance for which they had paid. At first instance, the Master rejected the tenants’ argument on the basis that the pandemic had not caused the Tenants not to pay their rents and the only way in which rent could have been “lost” for the purposes of the insurance policy was if the rent cesser clauses in the leases had been engaged so that the tenants’ contractual obligation to pay rent was suspended. In each of the leases before the Master the rent cesser provisions were in a standard form found in many commercial leases and only operated in the event of “damage or destruction” to the buildings. The tenants’ attempts to construe the words ”damage or destruction” (or such similar expressions) as extending to non-physical damage were rejected. Similar arguments advocating the existence of implied terms to the effect that the obligation to pay rent was suspended were also rejected, on the ground that the suggested terms did not meet the required tests for implication.
The failure of basis defence had not been raised before Master Dagnall and was a new point taken on appeal. Some tenants had raised an argument that there had been a part suspension or temporary frustration of the Leases during the lockdown periods when premises could not open for trade, but the Master, having reviewed the law in some detail, rejected the tenants’ arguments, noting there was no jurisprudential support for the concept of a partial or temporary frustration. A failure of basis defence had, however, been run in Trocadero, it being said that there had been a total failure of basis in relation to those periods of time during which the premises could be used as a cinema and that the leases were severable on a time apportioned basis.
The deputy judge in Trocadero rejected such an argument, primarily for the reason that use of the premises as a cinema was not fundamental to the basis on which the parties entered into the relevant leases. He did, however, say obiter, that if had he concluded that there was a failure of basis the tenant would have had an arguable claim that the leases were severable on a time apportioned basis. Like the Master in Bank of New York Mellon, the deputy judge rejected the tenant’s arguments for an implied term on the basis that the leases did not lack commercial or practical coherence and it could not be said that the terms sought to be implied were so obvious as to go without saying.
The Appeals
The Court of Appeal had little hesitation in rejecting the rent cesser defence in Bank of New York Mellon. The court agreed with the Master that the cesser clearly only operated where there is physical damage or destruction by an Insured Risk, and that the Master had been right to conclude that the insurance cover which the landlord had taken out was for loss of rent to the landlord where the tenant was not legally obliged to pay the rent (such as where the rent cesser applied) and not where the tenant chooses not to pay.
As for an implied term, the Court concluded that both leases worked perfectly well without the implied term, and allocated the risk that the premises could not be used for their intended purpose to the tenant, so that the tenant was obliged to continue to pay rent where the rent cesser provisions were not available. There was nothing unworkable or incoherent about this allocation of risk. The obviousness test was equally inapplicable. There was no obvious term which the officious bystander could say the parties would have obviously both agreed to, and the terms contended for were inconsistent with the express terms of the leases in that they sought to reframe the allocation of risk set out in the bargain the parties made.
As for the failure of basis defence, because both appeals concerned subsisting contracts, the limitations on the application of the law of unjust enrichment identified by Carr LJ in Dargamo Holdings Limited v Avonwick Holding Limited [2021] EWCA Civ 1149 applied. A claim in unjust enrichment could not contradict the terms of the contract and for a failure of consideration to be made out despite the existence and performance of a valid contract, it was necessary to identify a “gap” in the contract. There was no “gap” in the leases which was required to be filled by the law of unjust enrichment. The leases contained a carefully worked out contractual regime for the allocation of risk and any proposed ”failure of basis” would subvert that regime and contradict the terms of the contract.
The Court of Appeal agreed with the landlords that the consideration for the obligation to pay rent was the demise of the premises for, in each case, a 35 year term, giving the tenant exclusive possession, and rejected the tenants’ argument that there was an additional fundamental basis for the obligation to pay rent, namely a common understanding or assumption that the premises could lawfully be used as a cinema. The tenants’ argument was inconsistent with the express terms of the leases and the allocation of risk between the parties. The obligation to pay rent was only suspended where the rent cesser provision applied, namely where there was physical damage to or destruction of the premises by an insured risk, and there was simply no gap in the lease which required filling by a claim in unjust enrichment. The appeals based on failure of basis failed at the first hurdle.
In the circumstances it was not necessary for the court to consider the question of whether the obligation to pay rent could be apportioned and it declined to do so, noting that this issue was potentially complex and one which was better decided in a case where it is critical to the determination of the issues on appeal and not merely obiter.
A copy of the Judgment can be found here.
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