Lawbite: A happy ending for landlords of cinema operators

• United Kingdom

• Real estate dispute resolution
• Real estate litigation - LawBite

04-08-2022

Bank of New York Mellon (International) Ltd v Cine-UK Ltd AND London Trocadero (2015) LLP v (1) Picturehouse Cinemas Ltd (2) Gallery Cinemas Ltd (3) Cineworld Cinemas Ltd [2022] EWCA Civ 1021

The Court of Appeal has released its judgment on two appeals by cinema-operator tenants relating to rent arrears arising during the Covid lockdowns.

The tenants lost on all grounds, so the summary judgments against them for payment of the arrears stand. This is another good news story for landlords in recovering rent falling due during the pandemic lockdowns.

The appeals

The tenants had contended that rent (and service charge) should not be payable during the period within which the cinemas were compelled to close by law. They asserted that:

• the premises were incapable of lawful use for their intended purpose; the use as a cinema was fundamental to the lease and when the buildings could not be used as a cinema there was a total failure of basis / consideration, so no rent was due
• it should be implied into the leases that the rent would be suspended if there was a compulsory closure

One tenant raised an additional argument that the premises were ‘damaged’ and ‘not fit for occupational use’ in financial terms (rather than physically) and therefore the rent cessor clauses related to property damage were triggered, and rent was not due.

The Court of Appeal’s stance

• The Court of Appeal agreed with the landlords that the rent was payable regardless of whether the premises could be used for their permitted use. The tenants had continued to have exclusive rights to the premises during the terms of the leases in any event. The Court of Appeal rejected the ‘failure of basis’ argument because it would involve a reallocation of the risk the parties had freely negotiated in the leases
• the test for a term to be implied into a lease is that the term is required to give the lease ‘business efficacy’, or that the term is so obvious that it goes without saying. The Court found that, here, no terms needed to be implied to give the leases efficacy. Indeed, the proposed implied terms were in conflict with express terms. The leases provided that the landlord gave no warranty on whether the tenant could use the premises for the permitted use, so the risk had been allocated already on this
• the Court found that ‘property damage’ in the lease meant only physical damage, so that the rent cessor clause could not be relied upon

Key points

• the issues raised in these cases have led to parties in lease negotiations seeking express clauses on pandemic protection and force majeure to cover this type of situation

• the Court did not shut the door entirely on the ‘failure of basis’ argument. The argument in these appeals failed because of the specific wording of the leases, but the Court acknowledged that there may be other circumstances in which the argument may succeed, although the likelihood of the right circumstances being present are very limited

• these cases were initiated before the arbitration scheme under the Commercial Rent (Coronavirus) Act 2022 was introduced to address arrears accrued during the Covid pandemic

• a tenant who wants to use the arbitration scheme must make a referral to an arbitrator before the scheme ends on 23 September 2022 (the pre-arbitration steps mean that the initial letter should be sent by 25 August 2022 (see our InFocus articles here and Lawbite here on the scheme for more details). There is an option for the government to extend the deadline, but no indication has been given that it is planning to do

• after the scheme expires on 23 September 2022, the landlord has all options open regarding enforcement and recovery, and any unresolved ring-fenced pandemic rent is no longer protected