Key legislative and case law developments in the context of commercial rent arrears accrued during the COVID-19 pandemic are expected in England and Wales in the first quarter of 2022. The Commercial Rent (Coronavirus) Bill 2021-22, currently making its way through Parliament, will introduce a binding arbitration process to be used when commercial landlords and tenants are unable to agree how to deal with outstanding rent arrears built up during the pandemic. Two notable cases are also heading for the Court of Appeal in relation to tenants’ arguments for the nonpayment of rent during periods of pandemic-related enforced closure: London Trocadero (2015) LLP v Picturehouse Cinemas Limited and Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others.

The Commercial Rent (Coronavirus) Bill 2021-22 (the Bill)

The Bill, if passed as expected, is intended to operate as an arbitration scheme of last resort. This means that tenants will, in the first instance, be expected to negotiate with the landlord to agree how to deal with the pandemic-related rent arrears. It is expected landlords will seek to achieve a compromise with tenants where possible.

The existing regime under the Coronavirus Act 2020 (CVA 2020) includes measures restricting landlords’ remedies in respect of rent debts built up during the COVID-19 pandemic, including a moratorium on forfeiture and restrictions on the use of the Commercial Rent Arrears Recovery regime. The Bill is intended to come into force by late March 2022, with the expectation that this coincides with the phasing out of the existing restrictions under the CVA 2020.

The Bill will be supplemented by a nonbinding Code of Practice for commercial property relationships during the COVID-19 pandemic (the New Code). The New Code replaces the existing code published on 19 June 2020. The New Code includes guidance and principles on the approach to all negotiations regarding rent arrears accrued during the pandemic and the operation of the statutory arbitration process.

Landlords and tenants should note that as currently drafted, the Bill provides that any unresolved disputes relating to rent debts caught by the new legislation must be referred to arbitration within the period of six months beginning with the day on which the Bill is passed into law. Notably, the Bill includes provisions that restrict landlords’ remedies in relation to qualifying arrears until the six-month moratorium window for making a referral to arbitration has ended. The Bill will also have retrospective provisions, applying to certain landlord claims started on or after 10 November 2021.

London Trocadero (2015) LLP v Picturehouse Cinemas Limited [2021] EWHC 2591 (Ch)

The High Court granted the landlord summary judgement in its claim for rent and service charge arrears totalling £2.9 million accrued during the pandemic. The arrears accrued when the tenant, Picturehouse Cinemas, was unable to use the cinema premises demised under its two leases in the Trocadero Centre, London during periods of enforced closure due to COVID-19 restrictions. Notably, the lease contained an express provision that the tenant may use the premises only as a cinema and the landlord gave no warranty the premises could lawfully be used as a cinema.

The tenant unsuccessfully sought to argue that:

1. a term be implied into the lease that the rent and service charge should be suspended during any period for which the use of the premises as a cinema was illegal and/or during which the attendance would not be at a level commensurate with that which the parties would have anticipated at the time that the leases were entered into; and
2. there had been a partial “failure of consideration”, on the basis that the payments due under the leases were for the use of the premises as a cinema, with the result that no payments were due under the leases in respect of periods for which the premises could not be used as a cinema.

The High Court found that the proposed implied terms were inconsistent with the lease, unnecessary to give the lease business efficacy and not so obvious that they went without saying (the established legal principles for implying terms into contracts).

While the first instance decision will have come as some relief to landlords, it remains to be seen if the Court of Appeal will be persuaded by the tenant’s submissions in respect of the nonpayment of commercial rents during the pandemic based on implied terms and a failure of consideration.

Bank of New York Mellon (International) Ltd v Cine-UK Ltd and others [2021] EWHC 1013 (QB)

This case also involved connected landlords obtaining summary judgment for arrears of rent arising since March 2020. Again, the various tenants (the Court arranged for these similar cases to be heard together) respectively operated retail, nighttime and other leisure premises which had been forced to close during the pandemic due to government restrictions.

The tenants ran a number of defences, the most notable of which was perhaps that the lockdown constituted a “frustrating event,” to the extent the leases should therefore be treated as terminated. While the High Court accepted the doctrine of frustration could apply to leases, the factual circumstances did not go far enough to have amounted to a frustrating event.

Again, the tenants have been granted permission to appeal, and it will be intriguing to see how the Court of Appeal will approach the submissions relating to the COVID-19 restrictions constituting a frustrating event, if advanced by the tenant.

Conclusions

As outlined above, the year ahead promises a number of landmark legal developments in the context of the commercial landlord and tenant relationship. While 2021 was characterised by notable victories for landlords at the summary judgement stage, the question is whether such a trend will continue. Our experienced U.K. real estate team will continue to monitor and share these developments as they progress. Please contact your regular AT lawyer, or one of the listed authors, for additional information.