Louise Clark analyses the latest ruling in favour of landlords on unpaid rent during Covid-19, this time involving the London Trocadero.
Key points
- The more detailed and apparently complete the contract, the greater the presumption that nothing is to be implied into it
- Failure of consideration requires a failure fundamental to the agreement between the parties which is not inconsistent with other lease terms
- The words “without any deduction whatsoever” are not sufficiently clear to exclude equitable rights of set-off
The High Court has rejected a defence of failure of consideration to a claim for summary judgment for arrears of rent in London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and others [2021] EWHC 2591 (Ch); [2021] PLSCS 165.
The case is the latest attempt by tenants to assert creative defences to claims for rent arrears based on the unprecedented, unforeseeable nature of the pandemic. It follows successful applications by landlords for summary judgment for rent arrears in Commerz Real Investmentgesellschaft mbH v TFS Stores Ltd [2021] EWHC 863 (Ch); [2021] PLSCS 74, in which the court was satisfied that the defence did not rely on any new principles of law, and Bank of New York Mellon (International) Ltd v Cine-UK Ltd and other appeals [2021] EWHC 1013 (QB); [2021] PLSCS 80, in which defences of failure of consideration and partial frustration did not succeed.
The claim
The claimant is the landlord of leases of cinema premises at the Trocadero Centre in London which expire in September 2041. The defendants are the current tenant of the premises, the original tenant under one of the leases and the guarantor of sums due under both leases. Due to government restrictions between 23 March 2020 and 16 May 2021 the premises were open for only 71 days and takings during that period were £247,000, compared to £8.92m for the comparable period in 2018/19.
The landlord sought summary judgment for outstanding rent and service charges which, at the date of hearing in July 2021, were around £2.9m. The defendants counterclaimed in respect of rent paid under a mistake of law and insurance payments, to a maximum sum of £621,000.
The leases
The leases require rents to be paid in equal quarterly payments in advance on the quarter days “without any deduction whatsoever”. They also include a clause suspending payment of rent or service charge where the premises are unfit for use through damage or destruction by an insured risk: the landlord insures the premises and the tenant pays the premiums as additional rent. The premises cannot be used other than for the permitted use as “a cinematograph theatre or theatres” with ancillary sales of merchandise. The leases also provide that the landlord gives no warranty or representation that the premises can be lawfully used for such purposes.
The defences
The defendants put forward three defences to the claim for arrears:
- That terms should be implied into the leases to the effect that payment of rent and service charges should be suspended for any period when use of the premises as a cinema was illegal and/or when attendance would not be at levels commensurate with what was anticipated by the parties when the leases were entered into.
- That there had been a failure of consideration or failure of basis – a concept relevant to claims in unjust enrichment whereby a benefit is conferred on the joint understanding that the recipient’s right to retain it is conditional. Payments due under the leases were for use of the premises as a cinema and therefore no payments were due in respect of periods when the premises could not be used as a cinema.
- That the tenant was entitled to set-off in equity its counterclaim against any sums found to be due and such a right extended to the landlord’s claims against the original tenant and the guarantor.
Implied terms
Applying the principles derived from Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] EGLR 8, the court decided that such implied terms were neither necessary to give business efficacy to the leases nor so obvious that they went without saying. They were also inconsistent with the terms of the leases which provided for when rent would be suspended and the “no warranty” clause allocated risk regarding the use of the premises to the tenant.
Failure of basis
The failure relied on must be total and fundamental to the basis of the agreement. The court decided that use of the premises as a cinema was an expectation which motivated the tenant to enter into the leases, rather than fundamental to its entering into them. The leases expressly provided for circumstances in which the premises could not be used as a cinema – damage or destruction by an insured risk – and the risk of not being able to use the premises as a cinema lay with the tenant. A finding of failure of basis would interfere with the allocation of risk between the parties and be inconsistent with the terms of the leases.
Set-off
The court decided that the words “without any deduction whatsoever” were insufficiently clear to exclude equitable rights of set-off (Edlington Properties Ltd v JH Fenner & Co [2006] 2 EGLR 18). The tenant could set-off its counterclaim against any judgment against it, as could the guarantor in respect of sums due from the tenant. However, the landlord’s claim against the original tenant was a separate claim, so neither the original tenant nor its guarantor could claim a reduction as a result of the tenant’s right of set off.
The decision on failure of consideration in Bank of New York Mellon is being appealed to the Court of Appeal, so we have not heard the last of these arguments.
Louise Clark is a property law consultant and mediator
