Suspension of payment obligations due to Covid lockdowns?
Trocadero v Picturehouse Cinemas (High Court) [2021]
Covid-19 has had a critical impact on contracts just as it has on virtually all other aspects of daily life. The financial consequences have been enormous and quite unprecedented. It is therefore entirely unsurprising that the courts are now being asked to adjudicate on disputes related to the impact of the virus. In this particular case, the court had to decide whether the fact that a cinema complex had to close during a lockdown affected the liability of the tenant to continue to pay rent.
Facts:
Trocadero was the landlord of the Trocadero Centre, London. Cinemas at the Centre were let under two leases to Picturehouse Cinemas (‘the Tenant’). Under the leases: The permitted use of the premises was as a cinema. The Landlord expressly excluded any warranty that the premises could be used for the permitted use.
The Tenant covenanted to keep the premises open for trading during certain minimum trading hours so far as permitted by law. The Tenant also covenanted to comply with legislation and indemnify the landlord against any resulting liability.
Rent and service charge obligations were expressly stated to suspended if the premises could not be used because of damage by an ‘insured risk’. It was agreed by both parties that Covid-19 was not an insured risk.
From the 21st March 2020 to 3rd July 2020 cinemas had to close by law. They were allowed to re-open again on 4 July 2020 but subject to certain restrictions. The Tenant re-opened the cinema business on 31 July 2020. However, the business was not sustainable and the premises closed again on 9th October 2020. There was a further lockdown between 5th November 2020 and 1st December 2020 which prevented cinemas from opening. These restrictions were relaxed between 2nd December 2020 and 15th December 2020 although the Tenant did not re-open the business during this period. Cinemas were required to be closed again from the 16th December 2020 to 16th May 2021. From 17th May 2021 cinemas were allowed to open but still subject to certain restrictions. The cinema was open from that date.
No rent had been paid since June 2020. The Landlord brought proceedings seeking summary judgment for rent and service charge arrears of £2.9m. The Tenant argued that it was not liable for the arrears because: A term should be implied into the leases suspending payment of rent and service charges during periods when using the premises as a cinema was illegal or attendance would not be at a level commensurate with that anticipated when the leases were granted.
The Tenant also argued that there had been a failure of consideration i.e. the payments of rent 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.
It was accepted that the Leases had not been ‘frustrated’.
Decision:
The High Court rejected both arguments, finding that: The proposed implied term did not meet the required business efficacy test or the obviousness test [for a term to be implied] and was also inconsistent with the terms of the leases. The requirement for the Tenant to pay rent even though the premises could not be used for the intended purpose as a result of unforeseen, extraneous events did not deprive the leases of business efficacy or mean that they lacked commercial or practical coherence. Clearly, without the implied terms, the risk is shouldered by the Tenant. However, there is no good commercial reason why the loss should necessarily be borne by the Landlord. Where the risk should lie was a matter of negotiation. Risk lay with the Tenant, who could have taken out business interruption insurance (it being agreed that closure due to the COVID-19 pandemic was not an insured risk).
There was no failure of consideration. Taking account of the terms of the leases, the use of the premises as a cinema was not "fundamental to the basis" on which the parties entered into the leases. The continued and uninterrupted lawful use of the premises as a cinema was simply an expectation which motivated them to enter into the leases. In addition, the leases addressed the possibility that the premises could not lawfully be used as a cinema and allocated the risk to Tenant.
Points to Note:
- There are other similar cases pending, one of which is currently going to the Court of Appeal. It would be very surprising, given the principle at stake, if this case did not also go to the Court of Appeal or even to the Supreme Court. It will be interesting to see what happens should an appeal be made. Can it really be said that the ability to use the premises as a cinema was not "fundamental to the basis" on which the parties entered into the leases?