Commercial Rent Arrears During the Pandemic

The Court of Appeal recently (27 July 2022), handed down judgment in two cases involving commercial rental arrears that had accrued in the COVID-19 pandemic, (during the time when “non-essential” businesses had to close).

The two cases are “Bank of New York Mellon (International) Ltd v Cine-UK Ltd” and “London Trocadero (2015) LLP v Picturehouse Cinemas Ltd”. Both were dealt with by the Court at the same time.

The defendants in both cases were tenants of two commercial premises run as cinemas. Both argued that the rent due under the leases should not be paid during the period where Government COVID-19 regulations forced non-essential businesses to close, as it was unlawful to trade.

The tenants had already lost in the High Court but appealed the decisions to the Court of Appeal.

In the appeals, the tenants made the following arguments:

  • an implied term existed in their lease which suspended rent during periods in which cinemas could not lawfully be used for their permitted use due to COVID-19 restrictions;
  • the rent suspension provisions in the lease should be interpreted broadly and not limited to purely physical damage to the premises; and
  • because the leases had been entered into on the basis that the premises were to be used as a cinema, and that the COVID-19 restrictions had prevented this, there had been a complete failure of consideration.

The Court of Appeal unanimously rejected the tenants’ arguments and agreed with the landlords that the Government’s restrictions did not mean that the tenants were relieved from paying the rent.

Further, the Court held that the rent suspension clause only applied where the premises were physically damaged or destroyed by an insured risk, which was not the case in these two cases.

Finally, the Court held that for the failure of basis and consideration argument to have succeeded, there would have had to have been a gap in the lease which did not cater for the circumstances of the case. It was found that the leases did not have any gaps in this regard and if the tenant had been released from obligations to pay rent during the periods of closure this would have resulted in an unlawful re-allocation of risk.

The Court of Appeal dismissed both appeals. The outcome will be welcome news for landlords.

The Court has twice now ruled that the arguments raised by the tenants do not merit a relief from rent arrears.

However, landlords and tenants must be mindful that there are other cases in the court pipeline waiting to be heard, which may lead to a judge(s) taking a different approach. We will be alive to any further developments in this regard.

If you would like any advice or assistance on this or any other Commercial Property matters, please contact Mohammed Rahman at [email protected] or one of the other members of the Commercial Team on 01604 622101.