Covid rent: fundamental principles hold firm

Key points Insurance taken out by the landlord is for the landlord’s benefit even if the tenant pays for it  Use of premises for a permitted use was not fundamental to the basis on which the parties entered into leases The court will not rewrite the bargain made by the parties The Court of Appeal has refused to disregard or disapply fundamental principles when considering tenant defences against claims for pandemic rent arrears in Bank of New York Mellon (International) Ltd v Cine-UK Ltd; London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2022] EWCA Civ 102; [2022] PLSCS 125, to the relief of commercial landlords and their advisers.  Background  The appeals concerned cinemas – in Hengrove, Bristol and the Trocadero, London – which were let on long leases, with long periods still to run. Both had to close for significant periods in compliance with government restrictions between late-March 2020 and mid-May 2021. Judgments were entered for arrears of rent in favour of the landlords in April and September 2021 respectively. On appeal the tenants resisted the payment of rent for periods when the operation of the cinemas was unlawful on two grounds: (1) that government restrictions imposed by the pandemic caused a failure of basis, relieving them of the obligation to pay rent for those periods and;  (2) that it was an implied term of the leases that the tenant should be relieved of its obligation to pay rent where the tenant could not lawfully use the premises as a cinema.  The Hengrove tenant also argued that it was relieved of the obligation to pay rent by the rent cesser clause.  The leases The leases were professionally drafted demising to the tenants the properties for a term at a rent, which included insurance arranged by the landlord, which was to be paid without deduction or set-off. The premises were to be used only for the permitted use, as a cinema. Both leases also contained a “cesser of rent” clause which provided that if the property was destroyed or damaged by an insured risk so as to be unfit for occupation then the rent and service charge would be suspended until the property was made fit for occupation.  The judgments below In the Hengrove case, the tenant’s argument that it should be entitled to benefit from the landlord’s insurance since it had paid for it failed: the pandemic had not caused the tenants not to pay their rent. In any event, the rent cesser clause was limited to physical damage and destruction to the property. Not being able to trade for the permitted use was not, in the Master’s view, a partial failure of consideration but an unexpected occurrence which was no fault of the landlord.  An unjust enrichment claim requires total failure of consideration. The Trocadero tenant argued that the leases were severable on a time apportionment basis and there was a total failure of basis for those periods of time when the premises could not be used as a cinema. The judge decided that use of the premises was not fundamental to the basis on which the parties entered into the leases: the tenant’s claim interfered with the allocation of risk between the parties and was inconsistent with the lease terms. The implied terms were rejected in each case as neither obvious nor necessary to give the leases business efficacy.  The appeals The Court of Appeal was satisfied that, as a matter of construction, the rent cesser clause in the Hengrove case only operated where there was physical damage or destruction by an insured risk. The ordinary meaning of “in case the property… shall… be destroyed or damaged by any of the insured risks” so as to render it “unfit for occupation and use” only described unfitness caused by physical damage or destruction. Reference to insurance monies being laid out in the rebuilding or reinstatement of the property reinforced this conclusion.  The property was not damaged. The Hengrove tenant had suffered financial or economic damage. The Hengrove landlord was insuring against financial loss to its business as a property owner, not that of the tenant which could have taken out its own business interruption insurance. The Hengrove tenant did, in fact, have such insurance but it excluded pandemics.  The implied terms sought neither satisfied the business efficacy test so that without them the contract would lack commercial or practical coherence, nor was it so obvious that it went without saying that such terms should be implied: Yoo Design Services Ltd v Iliv Realty Pte Ltd [2021] EWCA Civ 560. The leases worked perfectly well without them, allocating risk that the premises could not be used for their intended purpose, to the tenant. The provisions sought to re-allocate that risk. An implication that rent was only payable under the Trocadero lease when the premises could be used as a cinema with attendance commensurate with the parties’ original intentions failed because there was no evidence as to what was anticipated when the leases were entered into.  As regards the failure of basis defence both appeals concerned subsisting contracts with years left to run. A claim in unjust enrichment can succeed where there is a subsisting contract but must respect the contractual regime and its allocation of risk. To sustain their argument, the tenants needed to identify a gap in the leases which warranted such a claim. There was no such gap. The leases contained a carefully worked out regime for the allocation of risk which the failure of basis argument would subvert. The consideration for the obligation to pay rent was the demise of the premises in each case for a term of years with exclusive possession. This had not failed.   Louise Clark is a property law consultant and mediator Image © Gareth Everett/Huw Evans/Shutterstock