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Business Tenancies: Tenants appeal High Court decisions that rent is payable in full despite business closure during pandemic (Bank of New York Mellon (International) Ltd v Cine UK Ltd and London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others – 2022)

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In previous High Court decisions where tenants were seeking declarations that rent was not payable to landlords due to enforced closure during the pandemic, the courts found in favour of landlords to conclude that rents were payable in each case. The Court of Appeal considers tenants’ appeals together in this recent decision.

The background

Bank of New York Mellon (International) Ltd v Cine UK Ltd and London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2022] concerned similar cases reviewed together by the Court of Appeal.

In the London Trocadero High Court decision, the tenant withheld rent during a period of business closure and periods where trade was very poor. The landlord brought a claim for arrears, which the tenant defended on the grounds that the lease contained implied terms that rent was not payable where the permitted use was illegal and claiming a ‘failure of basis’ while the tenant was unable to use the premises for its permitted use. The High Court found in the landlord’s favour; an implied term was neither obvious nor necessary, and the tenant could not evidence a total ‘failure of basis’ to support its argument, as use of the property as a cinema was not a fundamental basis on which the lease was entered into.

Our earlier report on London Trocadero (2015) LLP v Picturehouse Cinemas Ltd [2021]

In the Bank of New York Mellon case, tenants withheld rent for the period they were required to close, stating that landlords should recover losses under their insurance policies. Landlords had obtained ‘pandemic insurance’ prior to the pandemic. The High Court found in favour of the landlords, stating that pandemic insurance does not necessarily extend to a loss of rent simply because a tenant has chosen not to pay it and deems the requirement to pay rent whilst a business is closed unfair; tenants could have obtained business interruption insurance themselves.

Our earlier report on Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021]

All tenants appealed.

The decision

The Court of Appeal upheld the High Court’s decisions.

It was clear from the leases that rent cessers could be relied upon only where there had been physical damage or destruction to the building by an Insured Risk. Insurance covered the landlord for loss of rent only where the tenant was not legally required to pay it, and not in circumstances such as this where the tenant chose not to pay it.

Terms were not implied into the leases, and the risk that premises could not be used for their intended purposes was with the tenants in each case. Tenants remained liable for payment of rents.

Although tenants were unable to lawfully use the premises for their permitted use for a period of time, there had been no failure of basis. The fundamental basis for entering into the leases and to pay rent was for the grant of exclusive possession of premises for a specified term, not for the right to use the premises as a cinema.

Advice and action for landlords

These cases will be of great reassurance for landlords who did not receive rents during enforced pandemic closure of tenant businesses. Finding that there was no ‘Covid defence’ for tenants in respect of rent arrears, in these leases the rent cesser applied only to physical damage of premises and not to any other non-physical ‘damage’, even though a pandemic was reasonably foreseeable.

The leases operated without the need for implied terms, and there was no evidence to support any missing or incorrect allocation of risk in the leases to support a failure of basis argument.

It is of note that parties have until 23rd September 2022 to refer a matter to arbitration in respect of proposed relief from payment of rent debts. The Commercial Rent (Coronavirus) Act 2022 allows for both landlords and tenants to make a referral to statutory arbitration where rent is unpaid by a tenant following enforced closure of trading during the pandemic. This Court of Appeal decision should guide tenants in understanding which defences are likely to fail.

The Court of Appeal upheld the High Court’s decisions, concluding that the tenants had chosen not to pay rents and remained liable for their respective rent arrears. Rent cesser provisions did not apply, and the failure of basis defence could not be supported.

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