Covid Business Rent Arrears: Landlords in Pole Position
Commercial landlords have now had it confirmed by the court – as expected – that tenants owing covid-related business rents are legally required to pay up. While an alternative conclusion did not seem feasible, the claimants in an important case had put forward a novel argument in a so far untested area of law.
To recap, during the covid lockdowns ordered by government to minimise the spread of covid-19, many businesses had to close. Those particularly affected were those in the leisure, hospitality and retail sectors. In November 2021, the Treasury estimated that the total amount of unpaid business rent could reach £9 billion by March this year (pubs and bars, restaurants, clothes retailers and hotels would owe the most in arrears).
Contractually, commercial tenants’ liability to pay rent under the terms of their leases continued notwithstanding the enforced closures. But - perhaps predictably - some tenants sought to avoid their liability.
Boris Johnson’s government consistently encouraged commercial landlords to share the financial burden with their tenants if they were unable to pay in full. When The Commercial Rent (Coronavirus) Act came into force this spring, the then business minister said “landlords should try to share the burden, so we can all move on” (even though they weren’t legally required to).
London Trocadero1
In this important ruling (two appeals being heard together), the Court of Appeal confirmed the tenants’ legal obligation to pay unpaid rents that accumulated during the lockdowns, dispelling the argument that there had been a failure in consideration.
In the London Trocadero case, a cinema operator accumulated rent arrears owed to the landlord, the Bank of New York Mellon (International), but said it was not liable because the premises it leased were rendered unusable. During lockdown, the premises could not be used as a cinema - it would have been illegal to have used them. Therefore, a term to that effect should be implied into the lease.
The cinema operator also said there was a failure in consideration/failure of basis on the basis that the rent was for use of the premises as a cinema. Thus no payments were due for the lockdown periods when they could not be used as a cinema. Unsurprisingly, the appeal judges agreed with the High Court and rejected the tenant’s arguments. The court concluded:
· Applying the business efficacy test, the contract (the lease) as it stood worked perfectly well and did not lack commercial or practical coherence.
· The tenant continued to enjoy exclusive possession of the premises - even when they could not be lawfully used as a cinema.
· Even though the premises could not be used as a cinema for 280 days – the tenant still retained the benefit of the remainder of the 35-year term of the lease.
What does this mean?
Importantly, the ruling confirms the strict legal position and upholds long-standing principles of contract law. It’s also a common sense decision that clarifies the parties’ respective rights and obligations under contract. Had the leases lacked coherence, the outcome might have been different – the business efficacy test is key for any commercial party questioning their obligations or rights under contract.
In practical terms, the deadline for referrals to the statutory arbitration scheme for covid-related rent arrears available under The Commercial Rent (Coronavirus) Act expires imminently (23 September). Commercial landlords and tenants with outstanding disputes around rent arrears should take specialist advice as to what steps they can now take to resolve matters.
1London Trocadero (2015) LLP v Picturehouse Cinemas Limited [2022] EWCA Civ 1021
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