Is it the opening act or final curtain for commercial tenants in rent arrears?

It has been an eventful couple of weeks for property litigation lawyers especially those with an interest in the question of the impact of the COVID pandemic upon lease obligations particularly the payment of rent.

As a recap various tenants, both North and South of the border, have sought to rely upon three primary arguments in resisting actions by their landlords for recovery of rent arrears incurred during the pandemic. These can be summarised as 1) That specific contractual terms relieve the tenant from payment of rent in circumstances such as these; 2) That an implied term should apply that rent is not payable when the premises are closed or alternatively trading below a level reasonably expected at the time of formation of the contract; and 3) That the contract has been frustrated i.e. brought to an end as a result of events which render performance impossible and was not foreseen by the parties at the formation of contract.

Last week permission to appeal the decision of Bank of New York Mellon v Cine-UK Limited was granted and the case is due to be considered by the Court of Appeal in England. The basis of that appeal is that the court at first instance failed to correctly interpret the rent cessar provisions of the lease. The Appellant will seek to argue that the COVID pandemic and subsequent restrictions engaged the rent cessar provision and thereby relieved them of their obligation to make payment in terms of the lease.

This decision will be eagerly anticipated not least due to the High Court decision in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd which was issued yesterday. The Court in Trocadero has followed the emerging trend of BNY Mellon (at first instance) and Commerz Real Investmentgesellschaft v TFS Stores Limited which has systematically determined that the defences which tenants have sought to rely upon in such cases. In particular it considered the failure of consideration argument in significant depth and determined that such arguments have no realistic prospects of success. 

This case is also of interest as it involved circumstances where the tenant could not trade at all from the premises rather than in some other cases where the tenant could still have traded from the premises albeit in a very different fashion. The High Court however determined that this was of no consequence and that the arrears were still payable. In particular the High Court came to the view that given that such restrictions were temporary they fell to be considered as ordinary risks of business rather than justifying the end of a contract which would otherwise continue beyond the temporary closure.

With the net drawing in on these tenants the picture is bleak unless the Court of Appeal, the Inner House of the Court of Session or the Supreme Court comes to the conclusion that such defences have merit. With the Court of Appeal being the most likely court to consider this matter first, I am sure those practicing in this area will ensure they have front row seats when the curtain rises on this decision.