London Trocadero v Picturehouse Cinemas: a refusal to be swayed from established legal principles to accommodate difficulties faced during the Covid-19 pandemic

The claimant was a landlord of cinema premises at the Trocadero Centre in London. The defendants were tenants who had leased the cinema premises and guarantors who had guaranteed sums due under the leases.

The landlord sought to recover rent and service charge payments, in the region of £2.9 million, which were owing since June 2020 (up to July 2021). The tenants argued that they were not liable for charges that had arisen during that period because it was either unlawful, or unviable, to use the premises as a cinema due to government mandated Covid-19 restrictions. The court accepted that it had been unlawful or unviable for the tenants to operate the premises as a cinema for the relevant period. There was no dispute in relation to the facts.

The landlord applied for summary judgment against the tenants and the tenants sought to resist the application on the grounds that:

1) Terms ought to be implied into the leases to the effect that the tenants' obligations to pay rent and service charges would be suspended in the event that it became unlawful or unviable to operate the premises as a cinema; and/or

2) There had been a failure of consideration / failure of basis in relation to the period when the premises could not be used as a cinema. 

The court found that the tenants had no real prospect of successfully defending the claims against them and granted summary judgment to the landlord.

In relation to the issue of implied terms, the court reiterated that the default position is that nothing should be implied into a contract. The more detailed and apparently complete the contract, the stronger that presumption is. To satisfy the test for implying a term, that term needs to either be so obvious as to go without saying or be necessary to give the contract business efficacy. The court concluded that it was not obvious that a term should be included in the leases to the effect that the tenants should be released from their payment obligations. This was particularly so given that an express term of the lease stated that no "covenant, warranty or representation [was being given by the landlord] that the demised premises can lawfully be used for the Permitted Use [i.e. as a cinema]". The necessity test is also a stringent one and, as Lord Neuberger made clear in Marks & Spencer Plc v BNP Paribas Securities Services [2016] AC 742, a term will only be implied if “without the term, the contract would lack commercial or practical coherence”.  The court concluded that the fact that the tenants were required to continue paying rent and service charges in the circumstances did not deprive the leases of business efficacy. There was no good commercial reason why the loss occasioned by the pandemic should necessarily be borne by the landlord. The tenants' arguments on implied terms therefore failed.

The court then considered the issue of failure of consideration, otherwise known as failure of basis, as the foundation for a restitutionary claim by the tenants. A failure of consideration or failure of basis can involve the failure of a promised counter-performance but also the failure of a state of affairs on which the agreement was premised (hence the term a "failure of basis"). The tenants' argument was essentially that the ability to operate the premises as a cinema was a state of affairs on which the agreement was based. The court ruled that, although a claim in unjust enrichment resulting from a failure of basis can, in principle, exist, in this case the use of the premises as a cinema was not fundamental to the basis on which the parties had entered into the leases. It was simply an expectation which motivated them to do so. A claim in unjust enrichment for a failure of basis will not usually succeed where a contract is subsisting. This is because the law of unjust enrichment should not be used to overturn the parties' own allocation of risk as expressed in the contract. The court was influenced in this case by the fact that the parties had expressly dealt, in the leases, with other situations in which the premises could not be used as a cinema and had passed the burden of the associated risks to the tenants (as the party responsible for paying the insurance). As such, a finding of a failure of basis would have undermined the allocation of risk that had been agreed between the parties.

This case involved unsuccessful attempts by commercial tenants to avoid payment of rent and service charges, in the context of the COVID-19 pandemic, on the grounds of implied terms and failure of basis. Tenants in similar cases have sought to excuse themselves from contractual performance on the basis of frustration or prior breach by the landlord, but have been equally unsuccessful. It is worth noting, on the issue of frustration, that the court in Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] EWHC 1013 (QB) rejected the tenants' argument that their leases had been "temporarily frustrated" during the periods in which the relevant premises were forced to close. The court made clear that the doctrine of frustration only applies where performance under the contract has become so "radically different" to what was contemplated that it would be unjust to hold the parties to their bargain; and the result is to discharge the contract completely such that it cannot be revived. In short, the bar to establishing frustration is high, much like the threshold for implying terms into a contract and demonstrating a failure of basis.

The growing body of case law in this area collectively demonstrates a clear signal from the judiciary that they are not prepared to depart from, or indeed relax or develop, established legal principles in order to accommodate the unfortunate circumstances individuals and businesses find themselves in as a result of the pandemic. It is difficult to imagine what, if any, arguments remain available to tenants seeking to resist rent payments on account of the pandemic. It is, however, entirely possible that the Court of Appeal will take a different approach to these issues.