London Trocadero (2015) LLP v Picturehouse Cinemas Limited [2021] EWHC 2591 (Ch)

You could almost describe London Trocadero (2015) LLP v Picturehouse Cinemas Limited [2021] EWHC 2591 (Ch) as the last in the trilogy of cases dealing with rent debt in commercial leases.  The prequels were Commerz Real Investmentgesellschaft mbh v TFS Stores Ltd and Bank of New York Mellon (International) Ltd v Cine-UK Ltd.  In both cases, the tenants’ arguments disputing liability for unpaid rent during the pandemic were dismissed. Unfortunately, for both this tenant and all commercial tenants, there’s no twist at the end of this trilogy and London Trocadero, like its prequels, is also a landlord-friendly decision.

The case concerned two leases held by the 1^st defendant, Picturehouse Cinemas Limited.  Both leases expire in 2041. As you might expect from the tenant’s name, the tenant was a cinema operator and the permitted user was as a cinema only.

Due to COVID restrictions, both properties were closed for large parts of 2020 and 2021, specifically from March to July 2020 and October 2020 to May 2021.  As a result of the closures, the tenant took only £247k in revenue as compared to £8.92m for a similar period in 2018-19.  Whatever the outcome of this case, it is difficult not to feel sympathy for the tenant.

The landlord is the owner of the Trocadero centre and sued the tenant for rent debt of £2.9M.

In short, the tenant’s arguments in defence of the claim were as follows:

A term should be implied into the lease to the effect that the payment of rent and service charge should be suspended during any period for which the use of the cinema is illegal and/or during which the attendance would not be at a level commensurate with that which the parties anticipated at commencement of the lease (“the implied term defence”). 

There was a ‘failure of consideration’. In other words, what the tenant bargained for was the use of the premises as a cinema and this was the state of affairs on which the leases were premised. That state of affairs failed as a result of the inability to use the premises as a cinema due to COVID restrictions and therefore the tenant should not be obliged to pay the rent during those periods (“failure of consideration defence”).

The tenant argued it has paid certain amounts by mistake and that these amounts should be set off against any claim by the landlord. 

The tenant succeeded in respect of the last of these arguments but failed on the first two and it’s the decision on the first two which is likely to be of most interest to all those involved in commercial property.

Implied term defence

The court confirmed that the default position is that nothing is to be implied into a contract. The more detailed and apparently complete the contract is, the stronger this presumption is.  It is assumed that the lease was detailed and apparently complete, and so it was always going to be an uphill battle to persuade the court to imply any terms.

As to whether the term, if implied, would give the lease ‘business efficacy’, the court said that the requirement for the tenant to pay rent even though the premises could not be used does not deprive the leases of business efficacy or lack commercial or practical coherence. The court said that it made no commercial sense why the loss should necessarily be borne by the landlord.

The court also dismissed the argument that the landlord could take out insurance against closure because either party could have insured against it.

The court was also not persuaded by the argument that the term was so obvious that it ought to be implied. The court relied on the fact that the landlord expressly gave no warranty as to use and the parties specifically addressed their minds to the circumstances when rent should be suspended by virtue of the rent suspension clause. 

Failure of consideration defence

There was commentary in the Judgment as to whether any failure of consideration was partial or total but, in either case, the court accepted the landlord’s argument that what the tenant had actually bargained for was the grant for a term of years and therefore the tenant had received all or part of that benefit.  Therefore use as a cinema is not ‘fundamental to the basis’ on which the parties entered into the lease.

The court also found that, while there may be other reasons why premises could not be used as a cinema, the lease clearly puts that risk with the tenant.  The failure of consideration argument, if successful, would interfere with the agreed allocation of risk as well as being inconsistent with the terms of the lease.

Impact of the Government’s proposals to introduce binding arbitration

By way of context, this was a summary judgment decision. In other words, the landlord was arguing that the claim was so straight forward that the court could award judgment in the landlord’s favour without a full trial.  The court can only grant summary judgment where the defendant has no real prospects of successfully defending a claim and there are no other compelling reasons why the case should be disposed of at trial.

The Government’s binding arbitration proposals were considered in the context of whether they amounted to a ‘compelling reason why the case should go to trial’.  The court dealt with this point only briefly because it was addressed in a previous application by the tenant to delay the hearing.  In short, the court found that the Government’s proposals were not a compelling reason and that it could summarily assess the claim.

Comment

The tenant’s counsel was asking the court to ‘develop existing principles’ to find in the tenant’s favour. In other words, it might be fair to describe the tenant’s arguments in non-legal terms as ‘a bit of a punt’.   Save in respect of the third defence mentioned above, those arguments failed.  It is difficult to imagine what, if any, arguments are now left open to tenants in seeking to escape liability for rent debt accrued during the pandemic, even where premises were required to be closed by the COVID restrictions.

The recently announced Commercial Rents (Coronavirus) Bill has granted tenants some breathing space by stopping landlord’s debt claims in their tracks. Unless a claim was started on or before 9 November 2021, landlords are now prevented from making  debt claims for protected rent (namely rent, service charges and interest on rent or service charges which fell due between 21 March 2020 and 18 July 2021 at a time when relevant coronavirus restrictions were in force). Landlords are also prevented from enforcing any judgments made in those proceedings. If the landlord nonetheless commences proceedings, the court must immediately stay the proceedings. The earliest that debt claims can resume will be six months from the date the Bill becomes law (subject to a power of extension), or if earlier, when any arbitration process concludes.

The Bill also sets out the framework for the compulsory arbitration process – notably the arbitrator’s powers include the ability to reduce or write off debt and to extend the time for payment by the tenant by up to 24 months.

A version of this article first appeared in Costar on 4 October 2021.