Landlord and tenant – Rent arrears – Business premises – Respondent landlords issuing proceedings against appellant tenants for arrears of rent – Judge ordering summary judgment in favour of respondents on basis that no defence to claim for rent – Appellants appealing – Whether appellants liable to pay rent for periods during Covid-19 pandemic when operation of businesses from premises unlawful – Appeals dismissed
Two appeals raised the same issue of whether the appellants, who were the tenants of the respondent landlords and who operated cinemas at the premises, were liable to pay rent for periods during the Covid-19 pandemic when, owing to the coronavirus regulations, they could not lawfully operate their cinema businesses from the premises.
In each case, the respondents issued proceedings for the rent and sought summary judgment. The judge at first instance in each case ordered summary judgment in favour of the respondents, on the basis that the appellants had no defence to the claim for rent: [2021] EGLR 26; [2021] EGLR 43. The appellants appealed against those orders.
The appellants resisted the payment of rent for periods when operation of the cinemas was unlawful on two grounds: (i) the government restrictions imposed as a consequence of the pandemic caused a failure of basis, relieving them of the obligation to pay rent for those periods; and (ii) it was an implied term of each lease that the tenant should be relieved of its obligation to pay rent where the tenant could not lawfully use the premises as a cinema.
In the first appeal, there was an additional argument on behalf of the appellant that it was relieved from the obligation to pay rent by a rent cesser clause in its lease.
Held: The appeals were dismissed.
(1) The rent cesser clause clearly only operated where there was physical damage or destruction of the property which might require rebuilding or reinstatement.
It could not be said that the property, which was not a legal entity, had suffered financial or economic damage: rather it was the appellant which had suffered that damage. The juxtaposition of “damage” with “destruction” pointed to that being physical damage, which was borne out by the fact that the damage or destruction had to render the property “unfit for occupation or use”. The concepts of fitness or unfitness for occupation or use pointed to physical problems or constraints at the property.
It was impossible to construe the insurance policy taken out by the respondent as protecting the appellants from having to pay rent when it could not enjoy the premises. The cesser clearly only operated where there was physical damage or destruction by an insured risk. It imported some element of causation of the loss, not just the tenant choosing not to pay rent.
(2) None of the implied terms contended for in the two appeals satisfied either the “business efficacy” test or the “obviousness” test set out in Yoo Design Services Ltd v Iliv Realty Pte Ltd [2021] EWCA Civ 560. The business efficacy test would only be satisfied where, without the implied term, the contract would lack commercial or practical coherence. The relevant leases both worked perfectly well without the implied terms. Both leases allocated the risk that the premises could not be used for their intended purpose to the tenant, so that the tenant was obliged to continue to pay rent where the cesser of rent provisions was not applicable and there was nothing unworkable or incoherent about that allocation of risk.
The obviousness test was equally inapplicable. The term which it was sought to imply had to be precisely expressed and so obvious as to go without saying. If the officious bystander had asked whether the parties intended that, if the premises could not be used lawfully because of restrictions such as the coronavirus restrictions, the obligation to pay rent would be suspended, the respondent would have said no. Nor was it enough to show that, had the parties foreseen the eventuality which in fact occurred, they would have wished to make provision for it, unless it could also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred.
The test for implication was stringent and was nowhere near satisfied in the present appeals. Where, as here, the contracts in question were detailed documents prepared by lawyers, the scope for implication was limited. Furthermore, none of the terms contended for could be implied into the leases because they were inconsistent with the express terms of the leases, in the sense that they sought to reallocate the allocation of risk set out in the bargain which the parties made.
(3) The meaning of “failure of basis” extended beyond mere failure of counter-performance and could extend to failure of a bargain which was not contractual. A claim in unjust enrichment could not contradict the terms of the contract, and for a failure of consideration to be made out, despite the existence and performance of a valid contract, it was necessary to identify a gap in the contract. The leases contained a carefully worked out contractual regime for the allocation of risk, and any proposed failure of basis would subvert that regime and contradict the terms of the contract: Dargamo Holdings Ltd v Avonwick Holding Ltd [2021] EWCA Civ 1149 applied.
Since the basis of the obligation to pay rent under both leases was the demise of the premises for a 35-year term and, on the true construction of both leases, the obligation to pay rent was only suspended where the cesser of rent clauses applied, namely where there was physical damage to or destruction of the premises by an insured risk rendering them unfit for occupation or use, there was simply no gap in the lease which required filling by a claim in unjust enrichment. The contention that the fundamental basis for the obligation to pay rent was that the premises could be lawfully used as a cinema was inconsistent with the express terms of the leases and the allocation of risk between the parties.
Jonathan Seitler QC and Philomena Harrison (instructed by Maples Teesdale LLP) appeared for the appellant in the first appeal; Jonathan Seitler QC and Benjamin Faulkner (instructed by CMS Cameron McKenna Nabarro Olswang LLP) appeared for the appellants in the second appeal; Guy Fetherstonhaugh QC and Elizabeth Fitzgerald (instructed by Mishcon de Reya LLP) appeared for the respondent in the first appeal; Nicholas Trompeter QC and Chris de Beneducci (instructed by Druces LLP) appeared for the respondent in the second appeal.
Eileen O’Grady, barrister