Court of Appeal rejects Covid-19 pandemic defence for cinemas in rent arears

Shannon Breeze of Pinsent Masons said the highly anticipated ruling was “another blow to Covid-19 defence claims brought by tenants” and represented “a clear steer to the government’s preferred model of resolution by arbitration”. The Court of Appeal dismissed appeals by Cine-UK Limited and another cinema operator, which had both resisted paying rent to their respective landlords during periods when they could not lawfully operate their businesses due to the Coronavirus Regulations.

The court heard how the Coronavirus Regulations, introduced in late March 2020, forced both companies to close their premises to the public until early July 2020. At that point, the regulations were revoked and replaced with more limited restrictions that permitted cinemas to open under certain conditions. Despite the change, both cinema operators believed that a limited reopening was not commercially feasible.

In both appeals, the tenants argued that the government restrictions imposed as a consequence of the pandemic caused a ‘failure of basis’ in their leases, relieving them of the obligation to pay rent during those periods. They also argued that it was an implied term of their leases that the tenant should be relieved of its obligation to pay rent where the tenant could not lawfully use the premises as a cinema. Cine-UK also argued that it was relieved from the obligation to pay rent by the rent cesser clause in its tenancy agreement.

Handing down the Court of Appeal’s decision, Sir Julian Flaux said both leases “contain a carefully worked out contractual regime for the allocation of risk” and found that the proposed failure of basis would “subvert that regime and contradict the terms of the contracts in a way which… the law does not permit.”

He was also unconvinced that either lease contained implied terms that relieved the tenants of their obligation to pay rent. He said: “Both [leases] work perfectly well without the implied terms. Both leases allocate the risk that the premises cannot be used for their intended purpose to the tenant… and there is nothing unworkable or incoherent about that allocation of risk.”

Sir Julian added that Cine-UK’s landlord was “clearly correct” to argue that the “damage” and “destruction” mentioned in the rent cesser clause referred only to physical damage and destruction – and held that it was not relevant to the impact of the Coronavirus Regulations.

Breeze said: “This decision is important as it shows that the Court of Appeal remains focused on the true construction of both leases and express terms within. The ruling will likely deter tenants from proceeding via the litigation route – and encourage them to navigate via the arbitration process instead.”

She added: “Arbitration is the government’s preferred model of resolution as reflected by three recent awards: Signet Trading Limited Applicant and (1) Fprop Offices (Nominee) 4 Limited (2) Fprop Offices (Nominee) 5 Limited, KXDNA and 60 SA Limited, and Commerz Real Investmentgesellschaft mbH and RHL Realisations 2022 Limited (formerly Rush Hair Limited).”