The Court of Appeal did not overturn the High Court’s Original Decision
In November 2020, we wrote an article about how new Covid-19 clauses were beginning to appear in Commercial Leases. This was because, at the time, in the midst of the pandemic, many businesses were unable to trade or pay rent and, as restrictions eased and legal protection ended, landlords were able to take action to recover unpaid rent, especially before the mandatory arbitration scheme was implemented in March 2022 as part of the Commercial Arrears – Commercial Rent (Coronavirus) Act Part 1.
2021 saw the Court decide in favour of the landlord in several Covid rent arrears cases, and in July 2022 the Court of Appeal has decided in favour of the landlords, with its decision in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd. In this article, we look at the case in question and why the Court of Appeal made its decision. Such decisions, of course, are very difficult for the losing party, the tenant, which is why we revisit our article from November 2020 and re-look at the 4 areas in which Covid-19 clauses are appearing in Commercial Leases.
London Trocadero (2015) LLP v Picturehouse Cinemas Limited – The Details
This case relates to rent and service charge arrears of £2.9million that built up between June 2020 and July 2021 during which time Peterhouse Cinemas, the tenant, were either partially closed or fully closed at their landlord’s premises in London’s Trocadero Centre. The landlord decided to take action through the High Court, which judged in favour of the landlord. This created a precedent that many landlords went on to use as they pursued Covid rent arrears through the Court.
The tenant’s original case was based on the following main points, both rejected by the High Court:
- Implied terms – here it was argued that a term was implied into the leases that would suspend payment of rent and service charge during the Covid-19 lock down and restriction periods where it was unviable or unlawful to operate the premises as a cinema.
- Failure of basis – here, the argument was that there had been a failure of basis/consideration as the rent and service charge payments that were due for the use of the property as a cinema were not due when the property could not be used as a cinema.
Permission to appeal was granted. The Court of Appeal dismissed the Appeal and reaffirmed the High Court’s decision. A key point in the decision was that for a clause in the lease to be viewed as an implied term, it needs to be so obvious as to be understood, and that this should apply in this case of a Covid lockdown. The absence of such a provision in the lease in question meant that the unpaid rent and service charge was still due even when the property could not be lawfully used.
More recent cases of arbitration under the Commercial Arrears – Commercial Rent (Coronavirus) Act Part 1, in addition to this ruling, show that arbitrators and courts alike are unwilling to accommodate the difficulties faced by tenants during the various Covid lockdowns and restrictions.
New Covid-19 clauses in commercial leases. There are 4 key areas in which Covid-19 clauses are appearing in Commercial Leases
The effects of Covid-19 are being felt in every aspect of business life. In this article, we look at 4 key areas in which clauses relating to Covid-19 are now appearing in Commercial Leases and comment on some of the implications. A big thank you to an industry expert for supplying us with the text (and the expertise).
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Suspension of Rent
A suspension of rent clause (and service charge where applicable) for when the tenant cannot occupy the property due to Covid. The principle is correct – why should a tenant pay for something which they cannot occupy through no fault of their own? However, a key question is whether this will be covered under a landlord’s loss of rent insurance? Almost certainly not, we suspect. This means that the success of this amendment will generally depend on the bargaining strength of the parties.
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Rent concessions
Landlords are generally amenable to concessions of this nature, provided that they are temporary. However, they will not wish to consider having to re-let property in the current climate. Such concessions should be covered in a side letter. The difficulty here comes in defining when the concession comes to an end. A potential alternative for retail clients is to link part of the rent to turnover.
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Termination
A right for the tenant to terminate the lease if they cannot occupy the property due to Covid. This will almost certainly be resisted by landlords unless the term of the lease is very short. It might be worth looking at suspension provisions instead. Such a clause has previously been used on nuclear licensed sites where a nuclear incident arises.
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Service Charge
Will the landlord be vulnerable to a claim by the tenant that it has not complied with an obligation to provide services due to Covid? Most properly drafted service charges contain a clause releasing the landlord from its obligations if the provision of the services is suspended due to events beyond its control. Will this extend to Covid? Careful drafting will be required.
As ever, the devil is in the detail! What these words tell us is that Covid has delivered complexity into the Commercial Leases’ market, putting an ever-greater premium on tenants and landlords being well advised and well prepared.
How can Insolvency Practitioners help?
From an insolvency point of view, this is a key area that we look into when engaged by businesses who are facing insolvency, as part of enabling us to investigate all options to help businesses recover if at all possible. Our first aim is to look at ways of saving a business.
As always, the sooner action is taken the more options are available. Please contact us or call any of our offices, below, for a FREE and NO OBLIGATION initial discussion on the ‘phone, through Teams or ZOOM or over a coffee.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley:
