222: London Trocadero wins High Court battle against Picturehouse over unpaid lockdown rent

London Trocadero, owner of the Trocadero Centre in Piccadilly Circus, took action against its tenant for arrears of rent and service charge which accrued during the pandemic when it could not be used as a cinema. This blog is an update from a transactional perspective following our recent article on London Trocadero (2015) LLP v Picturehouse Cinemas Limited [2021] EWHC 2591(Ch).

The Trocadero Centre was subject to two leases which were held by Picturehouse Cinemas. The key terms of the leases were:

• the permitted use of the premises was as a cinema. The lease expressly stated that there was no warranty on the part of the landlord that the premises could be used for the permitted use;
• there was a keep open covenant requiring the tenant to keep the premises open for trading during certain specified hours, so far as this is permitted by law;
• there was a tenant covenant to comply with legislation and indemnify the landlord against any liability in this regard;
• rent was to be paid by equal quarterly payments in advance on the quarter days, such payments to be without any deduction whatsoever; and
• the tenant was required to pay additional rent equal to the cost of insuring against certain specified insured risks. Reference to the COVID-19 pandemic was not included in the definition of insured risks. Rent and service charge were suspended if the premises could not be used because of damage by an insured risk.

In March 2020, due to the COVID-19 pandemic, the cinema closed and no rent has been paid since June 2020. As a consequence the landlord brought proceedings seeking summary judgment for rent and service charge arrears totalling £2.9 million.

The tenant sought to defend the application on the following basis:

• terms should be implied into the leases providing that payment of rent and service charge should be suspended during any period when using the premises as a cinema was illegal or the attendance would not be at the same level as that anticipated when the leases were entered into; and
• there was a partial failure of basis; the payments due under the lease were for the use of the premises as a cinema and so no payments were due for periods when the premises could not be used as a cinema.

Decision

The High Court rejected both arguments on the following basis:

Implied terms

Referring to the previous decisions in Marks & Spencer Plc v BNP Paribas Securities Services and Yoo Design Services Limited v Iliv Realty Pte Limited, the High Court found that the proposed implied terms did not meet the following tests:

• Business efficacy test – the High Court emphasised that it is not enough that the term might be fair or reasonable; it is a question of necessity – would the contract lack commercial or practical coherence without the proposed implied term. The High Court found that the obligation to pay rent even though the premises could not be used for the intended use as a result of unforeseen events did not deprive the lease of commercial or practical coherence
• Obviousness test – for the same reasons as above the High Court found that the implied terms did not satisfy the test of such terms being so obvious that they go without saying.

The High Court found that the issue of liability for rent was a risk which was a matter for negotiation between the parties. In these circumstances that risk lay with the tenant, who could have taken out business interruption insurance to protect against such unforeseen circumstances preventing the tenant from carrying out their business.

Failure of basis

The High Court emphasised the need for a failure of the relevant state of affairs to be fundamental to the basis of the agreement, rather than a mere failure of an expectation which was not fulfilled.

Considering the terms of the leases, the High Court found that the use of the premises as a cinema was not ‘fundamental to the basis’ on which the leases were entered into but was instead an expectation which motivated the tenant to enter into the leases. The permitted use of the premises being only as a cinema emphasises that the risk that the premises may not be used for that purpose is one borne by the tenant.

Conclusion

From a landlord’s perspective, this decision comes as welcome relief that they are still able to pursue tenants for non-payment of rents in circumstances where the tenant was unable to trade during the COVID-19 pandemic.

A well advised tenant should seek engagement with their landlord as soon as possible to try and reach a commercial resolution over unpaid rent arrears, such as a side letter agreeing reduced rent or a payment plan.