Unpaid Rent and the ‘Covid Defence’: Part 2

Unpaid Rent and the ‘Covid Defence’: Part 2

Key Contact: Jennifer Butcher

Authors: Laura Spence

The Covid-19 pandemic has brought commercial rent arrears to the attention of the court once again. Following on from the cases of Commerz and TFS (please see our previous article) which were both found by the court to be in the Landlords’ favour, London Trocadero LLP v Picturehouse Cinemas Limited and others [2021] (“London Trocadero”) now further affirms the belief that the courts are likely to continue to take this approach in relation to rent arrears.

Background

The owner of Trocadero Centre brought a claim against the Tenants, all being part of the Cineworld group. A series of Covid-19 regulations imposed restrictions on the operation of cinemas between 21 March 2020 and 19 July 2021 meaning the Tenants had to close their business multiple times and subsequently, from June 2020 decided to withhold rent, amounting to a total value of approximately £2.9 million. The rent was withheld by the Tenant on the basis that a term to this effect should have been implied into the Lease or, on the basis there had been a failure of consideration (known as failure of basis).

The Claimant put forward three defences for the claim for arrears:

1- There should be an implied term in the Lease that that the rent and service charge should be suspended for any period where the premises could not be used as a cinema

As the parties did not contemplate the pandemic an objective stance was taken by the Court. The defence failed because the terms failed to meet the business efficacy test or the obvious test and are inconsistent with the terms of the Lease. The terms were too uncertain because dependant on uncertain events (an unforeseen pandemic).

The Court’s attention was particularly brought to the fact that the Landlord had not explicitly given a warranty as to legality of the use of the premises and that there was a clause dealing with rent suspension in certain circumstances.

2- That there was a total failure of consideration.

The Tenant argued that they had entered the lease on the use of the premises as a cinema, which they had not been able to use due to Covid-19. The court determined that the use of the premises as a cinema was not fundamental to the basis on which the parties entered the lease.

The Court referred to Ocelota Limited v Water Administration Ministerial Corporation [2000] NSWSC 370 when discussing whether the Lease was severable and again concluded that a total failure of consideration was required.

3- The Tenant is entitled to set-off equity in its counterclaim in respect of insurance issues against any sums otherwise found to be due

The Court found in favour of the Tenants on this point, reducing the judgement against the Tenants by the amount of the counterclaim. The Court concluded that “without deduction” in the relevant clause does not exclude the equitable right to set off therefore, on granting summary judgement to the Claimant the sums were reduced by £621,000 being the alleged overpayments of insurance sums.

Conclusion

Despite finding one defence in favour of the Tenants on this case, the judgment once again clearly demonstrates the court’s attitude towards rent arrears, despite Covid-19. As more businesses start / increase trading in the post Covid-19 climate, this finding will come as an encouragement for Landlords who having waited in some instances over 18 months to gradually now start their attempts to recover unpaid Covid-19 rent arrears.  

For further information or advice on any of the topics raised in this article please contact our Litigation Team.

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