Time’s Up for Avoiding Covid Rent Arrears

Numerous commercial landlords and tenants in the UK will have been waiting for almost two years to find out how the courts would approach the issue of liability for covid rent arrears.

The long-awaited appeal ruling in London Trocadero1 has been of particular interest to businesses in the retail, leisure and hospitality sectors and their landlords – having been particularly impacted by the lockdowns.

The Treasury had estimated that the total amount of unpaid business rent could be up to £9 billion by March this year, with pubs and bars, restaurants, clothes retailers and hotels owing the most.

The Court of Appeal has now confirmed, as expected, that tenants owing unpaid commercial rents which had accumulated during the state-ordered lockdowns in the pandemic must pay up to their landlords.

In purely legal terms, the courts could not conceivably have arrived at any other conclusion without striking at the heart of basic contractual legal principles. However, the fact remains that this case concerned an untested area of law and the court’s approach and analysis is useful.

The backdrop to the case is well known, and experienced by businesses up and down the country. During the lockdowns, through 2020 and 2021, a significant number of businesses were legally required to close in an effort to manage the spread of covid-19.

Many businesses were not financially viable if they could not continue to operate, yet their contractual obligations to pay rent continued notwithstanding their enforced closures. Those who were unable to pay rent went on to accumulate substantial rent arrears; landlords lost an important income stream causing financial hardship for many.

It was an unprecedented situation, and government has long recognised the extent of the financial impact particularly on tenants, urging landlords to consider sharing the burden. In fact, when The Commercial Rent (Coronavirus) Act came into force in March 2022, the then business minister said that where tenants are unable to pay the rent arrears in full “landlords should try to share the burden, so we can all move on” (even though they weren’t legally required to).

What was the crux of the case?

In this case, the tenant was a cinema operator who did not pay rent to its landlord - the Bank of New York Mellon (International) – for the lease of cinema premises during lockdowns. The tenant argued that it was not liable given that the premises were rendered unusable (it would have been unlawful to have used them); and the premises could not be used as a cinema. The tenant argued that a term to that effect should be implied into the leases.

The tenant also offered a somewhat novel argument - there was a failure in consideration/failure of basis. This was propounded on the basis that the rent was for use of the premises as a cinema, therefore no payments were due for periods when the premises could not be used as a cinema.

Given that had such an argument succeeded, basic principles of contract law would have been upended, it seems somewhat strange that the tenant’s lawyers persisted in this argument.

It’s not surprising that the Court of Appeal upheld the High Court’s decision in the landlord’s favour. The CA confirmed that the business efficacy test will only be satisfied where, without the implied term, the contract would lack commercial or practical coherence.

In this case (and, incidentally, another case being heard at the same time), that was not the case with these leases - “They both work perfectly well without the implied terms.” The risk was allocated in such a way that the tenant was obliged to continue paying rent where the cesser of rent provisions were not applicable.

Furthermore, the tenant continued enjoying exclusive possession of the premises under the lease -even when the premises could not be lawfully used as a cinema. The court also considered the wider picture, that whilst the premises could not be used as a cinema for 280 days – the tenant nonetheless retained the benefit of the remainder of the 35 year term.

While the outcome was not much of a surprise, landlords will have sighed with relief that the issue has been settled – significant sums of money have been at stake.

Under the 2022 Act, the parties are required to work together towards resolving disputes around covid-19 rent arrears, and if they can’t – the new legally binding arbitration process is available. However, there is a deadline of 23 September by which referrals to arbitration should be made. In practice, it’s probably too late now. Time has almost run out for an extension and it seems unlikely that the government will extend the deadline.

1London Trocadero (2015) LLP v Picturehouse Cinemas Limited [2022] EWCA Civ 1021


Posted on 16.09.22