The Picturehouse litigation: post-Covid, the Court of Appeal emphasises that contracts are meant to be binding

The Court of Appeal, in the conjoined appeals of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and Bank of New York Mellon (International) Ltd v Cine-UK Ltd, once again vindicated beleaguered landlords by refusing to imply terms into professionally negotiated leases.  Tenants cannot withhold rent except in circumstances expressly set out in the lease.   

Buttressing the judgment is the reiteration of the stated “fundamental basis” of a lease: it is an estate granting exclusive possession for a fixed term, in consideration for payment of rent. The tenants’ frustrated intention to use the premises as a cinema was not sufficient to cause a total failure of consideration.

Background

The defendant tenants are both part of the troubled Cineworld Group plc, which is the second largest cinema operator in the world. The appeals related to whether they remained liable to pay rent when COVID-19 restrictions required them to close their cinemas. The landlords pursued the defendants for arrears incurred during this time, and, because there was no basis in law for the tenants’ defence, the landlords successfully applied for summary judgment.  That first instance decision gave rise to this appeal.   

The Arguments

The tenants put forward the following arguments:

• COVID-19 restrictions caused a “failure of basis”, which should therefore give rise to a restitutionary claim against the landlords. The tenants had had no benefit from the contract during this time and therefore, they argued, if they did pay rent, the landlords would unjustly benefit from its receipt; 

• a term should be implied into the leases that the obligation to pay rent would be suspended when the lawful use became impossible; and

• in respect of one of the leases, that the tenant were relieved of their obligations to pay rent by the rent cesser clause in the leases.

A strong Court of Appeal firmly rejected all three arguments.

Unjust enrichment

This was an audacious defence for the tenants to raise.  Unsurprisingly, the court preferred to maintain the status quo rather than extend radical restitutionary principles to undermine established property rights.

It restated that a lease was a contract whereby the tenant was granted exclusive possession, for a term, at a rent.  The COVID-19 regulations did not alter this basis.  The jointly held knowledge at the grant of the lease that the tenant would use the premises for a cinema was immaterial; to suggest that the landlords had unmeritoriously benefited by continuing to demand rent when the tenants could not run their business, was to impose the alien idea that the landlords and the tenants had agreed to share a commercial risk.

In addition, one of the leases permitted change of use with the landlord’s consent and therefore contemplated an alternative use to a cinema. The other lease specifically stated that the landlord gave no reassurance that the premises could actually be used as a cinema, and the same lease also contained a tenant covenant to comply with statute. The allocation of risk was therefore again laid upon the tenant; a statute might prevent it from being able to use the premises, but the rent obligation remained.

Rent Cesser

Under the rent cesser clause in one of the leases, rent was to be suspended where the premises were destroyed or damaged so that the tenant was unable to occupy or use the premises.  

The tenants’ argument was that damage could be financial and not just physical. The sole permitted use under the leases was as a cinema. The rent cesser therefore provided for rent to be suspended where government restrictions “damaged” the premises by making them unfit for cinema use.

Again, the court found against the tenants and held that this was a distortion of the natural meaning of words.  Words should be given their natural and ordinary meaning.  “Damage” meant physical damage, and this was underlined by the juxtaposition of “damage” with “destruction”.

Later wording in the clause purportedly supported this interpretation, affirming that such cesser would continue until the premises were rebuilt or reinstated so as to again be fit for occupation and use.  If this was impossible within a three year period, then there was the right for the tenants to terminate the leases. Only physical damage requires rebuilding or reinstatement.  Further, an estate in land such as a lease has no legal personality and therefore it cannot suffer consequential financial damage.

Implied Terms

The tenants advanced a further bold argument, that there should be a term implied into the leases that for any period during which the permitted use became illegal, the obligation to pay rent should be suspended.

Last year, the Court of Appeal restated the law on the implication of terms into professionally drafted documents, namely that:

• this should only be done where it is necessary to give business efficacy to the contract, such that the contract would lack commercial or practical coherence without it; or

• the necessity for implication is so obvious that it goes without saying.

As the leases worked without the requested terms being implied, the tenants’ argument was rejected.  The suggestion that landlords would have automatically have agreed to a rent suspension if the possibility of the COVID-19 situation had been raised during negotiation of the leases was unrealistic.

A key focus of the judgment was the allocation of risk. To imply the terms the tenants were suggesting would contradict the express terms of the leases and reallocate the risk bargained for between the parties.

Conclusion

The Court of Appeal has once again demonstrated its reluctance to depart from long established land law principles, and again shown why England and Wales is an excellent place for property investment.  Even an event as novel as a global pandemic will not displace an innate conservatism to develop the common law only incrementally, based on established legal principles.

This is one of a series of cases arising out of the COVID-19 pandemic, which has illustrated how English courts value certainty and precedent over short term alleviation of purported unfairness.  From a landlord’s perspective, this is in welcome contrast with certain European countries where leases have been deemed to have been frustrated, or state-sponsored rent holidays have been imposed. 

It would be inaccurate to brand the English courts as always “landlord friendly” in relation to commercial leases. However, despite unparalleled world events, they have shown awareness of larger economic and political concerns, using common law precedent as a robust mechanism to achieve this. 

Post Script

This judgment may sadly prove to be a pyrrhic victory for the landlords.  Cineworld Group plc, has already filed under Chapter 11 for bankruptcy in the US.  Whilst it denies that it is planning insolvency measures in the UK, its share price has fallen dramatically such that restructuring or sale may be the only long term solution and, from a landlord’s perspective, restructuring laws offer less protection than they would like.

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