Covid-related Commercial Rents and Failure in Consideration
Businesses are waiting expectantly for the next ruling around the legal conundrum of who should be held liable for covid-related rent. The Court of Appeal has just heard argument in an important appeal as to whether or not a commercial tenant, who was negatively impacted by the pandemic, is legally responsible for payment of rent during that period.
The outcome of the London Trocadero1 case will be significant for many commercial landlords and tenants. This is partly because the case raises an issue not raised in earlier claims around covid-related rent arrears – the argument that there was a failure in consideration.
What are the facts?
The tenant paid no rent under two leases of cinema premises from June 2020 until at least July 2021 (when the High Court heard the landlord’s claim). The arrears reached some £2.9m. The tenant defended the claim denying liability for rent and service charges which arose during lockdown when the premises could not be used as a cinema. The tenant argued that:
· A term to this effect should be implied into the leases or, alternatively
· There was a failure of consideration, even though the leases had not been ended by frustration and the landlord was not in breach of the terms.
The purported failure in consideration was that rent payments were for use of the premises as a cinema, therefore no payments were due for periods during which the premises could not be used as for that purpose. The landlord succeeded in obtaining summary judgment for the amounts outstanding.
The High Court was unwilling to imply a term into the lease as requested. The fact that the tenant was liable for the rent even where the premises could not be used for their intended purpose “as a result of unforeseen, extraneous events” did not deprive the leases of business efficacy; or mean the leases lacked commercial or practical coherence. There was also no good commercial reason why the landlord should bear the loss – rather, it should be a matter for negotiation between both parties as to where the risk should lie.
As for failure in consideration (also known as ‘failure of basis’), the tenant argued that the agreed use of the premises as a cinema failed as a result of the inability to use the premises as a cinema due to the various covid restrictions. This was rejected: to find otherwise would interfere with the agreed allocation of risk between the parties and would be inconsistent with the lease terms.
It seems unlikely the appeal judges will come to a different conclusion, otherwise it could well have wider implications for long-standing principles of contract law.
What does this mean?
The pandemic undoubtedly caused massive financial problems for many business, particularly those within the hospitality and leisure industries. Many of these businesses could not (for obvious reasons) continue to afford the rent payments during the national lockdowns; but their non-payment of rent has caused problems for landlords relying on rental income – resulting in financial difficulties for many.
The courts have a difficult balancing act to achieve. We’ll report back on the appeal judges’ decision once it’s handed down.
1London Trocadero (2015) LLP v Picturehouse Cinemas Limited
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