For some time since the start of the COVID-19 pandemic, commercial tenants have sought to rely on the challenges presented by the pandemic as a means of arguing that their rent liabilities should be reduced. For example, because the tenant has not been able to use the premises as a result of the national restrictions imposed by the government.

The government has so far been clear in that where tenants are able to pay their rent, they should do so. However, commercial landlords and tenants were encouraged to apply the voluntary Code of Practice for commercial property relationships during the COVID-19 pandemic in a bid to reach a mutually acceptable way forward.

Despite that, it has largely fallen to the courts to decide whether or not a commercial tenant may be entitled to withhold rent during any periods where it has not been able to use the property as intended due to the consequences of the COVID-19 pandemic.

Tenants will have already been apprehensive about their chances following the landlord-friendly decisions in Commerz Real v TFS Stores Ltd and Bank of New York Mellon (International) Ltd v Cine-UK Ltd. However, will the recent decision in London Trocadero (2015) LLP v Picture House Cinemas Ltd [2021] mean that it is now finally time for tenants to admit defeat?

London Trocadero (2015) LLP v Picture House Cinemas Ltd [2021]

The tenant operated a cinema in the Trocadero Centre in Piccadilly Circus. Given the restrictions imposed by the government to battle the COVID-19 pandemic, the tenant was unable to open its doors to potential customers for a large period of the pandemic resulting in a significant drop in revenue. Nevertheless, the landlord insisted on payment of its rent in the sum of £2.9m.

The tenant argued two defences:

1) That a term should be implied into the lease upon which rent should be suspended and cease to be payable for any period where the permitted use of the property was to become illegal. Further, the tenant argued that it should also be implied that sums due under the lease should only be payable during periods in which the attendance figures were at a level commensurate with that which the parties anticipated at the commencement of the lease.

2) That there was a failure of consideration or total failure of basis. The tenant’s logic behind this was that what the tenant bargained for was the use of the premises as a cinema and as such, the lease had been granted for that basis. Given the restrictions imposed on the cinema, the basis had failed and consequently, the tenant should not be expected to pay rent during that period.

Both of these arguments failed to persuade the High Court which held, by way of its summary judgment decision, that the implied terms were not necessary for the business efficacy of the lease.  In short, the court said that the requirement for the tenant to pay rent even though the premises could not be used does not deprive the lease of business efficacy. Further, the court held that the landlord had not warranted that the premises would always be able to be used as a cinema, but rather what the tenant had bargained for was the grant for a term of years, which the tenant had received.

How does this impact the proposed COVID rent arbitration scheme

This case comes in the midst of the government’s proposed “binding arbitration” scheme for rent arrears which have accrued during the COVID-19 pandemic. The exact details of that scheme, including the date that it will be introduced, are still largely unknown, causing uncertainty for landlords.

Interestingly, the tenant in the London Trocadero case sought to have the summary judgment hearing adjourned, arguing that they would otherwise be prevented from participation in the anticipated arbitration scheme, which may cause to limit the courts’ jurisdiction in dealing with COVID-19 arrears cases. The court rejected this argument and the decision that tenants cannot seek to avoid payment of debts that they are already disputing in court proceedings by relying on the proposed arbitration scheme will, for the time being, stand as authority.

Landlords should be comforted by the decision for now as the option to pursue tenants for non-payment of rent caused as a result of the COVID-19 pandemic remains an arrow in their quiver. However, landlords will be following news of the government’s binding arbitration scheme proposals with a watchful eye as there remains uncertainty about how such a scheme will apply in practice. What can be expected, however, is that it will be less landlord-friendly than the judgments we have seen to date. Tenants may find some refuge in the proposed scheme and could try to use the uncertainty in their favour as a means for negotiating settlements with landlords.

If you have any questions or concerns about commercial rent arrears in relation to your matter, please contact our specialist property litigation lawyers by emailing online.enquiries@la-law.com