Court of Appeal to review Trocadero case about Covid-related closure of retail shops and the doctrine of "failure of basis"  

Avid readers of HSF Real Estate Development Notes will remember us reporting in our October blog on the Trocadero case. This followed the High Court's decision to grant summary judgment to the landlord of commercial premises in a claim for arrears of rent and service charges due since the outbreak of the Covid-19 pandemic. The Court refused to stay the proceedings pending introduction of the legislation for an anticipated "binding arbitration scheme". Both landlords and developers attempting to assess the risk of rent shortfalls for their investment properties would have taken positives from this decision, as it means that proceedings for recovery of Covid-19 arrears should not be affected by the arbitration scheme, unless and until it comes to an end. Our last blog focused on the question as to whether a stay should ever be granted given this prospective new legislation.

News has emerged in the last day that the tenant has been given permission to appeal the whole of the Court's decision. A temporary stay of execution has been put in place pending hearing of the appeal. It is therefore a good time to focus on the technical arguments that form the basis of this dispute, and why these are important across the country to commercial developers, landlord and tenants.

For context, there have been attempts by tenants in the past, both pre-pandemic (see for example Canary Wharf (BP4) T1 Ltd and others v European Medicines Agency [2019] EWHC 335 (Ch)) and since lockdown, to raise arguments that rent is not payable due to changes in circumstances applicable to the tenant's business. However, in contrast to previous cases where claims to be excused from contractual performance have been based primarily on force majeure or frustration (see for example Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] EWHC 1013 (QB) and Commerz Real Investmentgesellschaft MBH v TFS Stores Ltd [2021] EWHC 863 (Ch), the tenant's arguments in Trocadero were based on alleged implied terms and a total failure of consideration (or "failure of basis" as it is now called).

In Trocadero, the Court acknowledged that for certain periods it was unlawful to operate the premises as a cinema due to Covid-19 restrictions, and at other times it was uneconomic to do so.  But the Court found that there was no real prospect of the tenants establishing that terms should be implied to the effect that the payment obligations under the leases were suspended during those periods. Nor was there any real prospect of establishing that there had, in the circumstances, been a "failure of basis".  As such, the Defendants could not avoid paying rent for the affected period.

Whilst the argument ultimately failed in this case, the Court stated that it may be possible for a party to pursue a claim for unjust enrichment for rent paid in circumstances where:

1. the actual, physical use of the premises in a specified way was a foundation of the leases, ie where it was fundamental to the basis on which the parties entered into the leases rather than simply an expectation which motivated them to do so; and
2. that use was unavailable for a specified period of time (the Court having found that it was reasonably arguable that the leases could be severed on a time basis, so that there could be a total failure of basis in respect of a severable part of the leases).

The particular context of leasehold law is relevant to the outcome of this case. A lease is not in usual circumstances a contract premised upon actual use of premises. Indeed, many leases contain confirmatory wording at least as regards planning compliance, that the landlord gives no warranty that the premises can be used for their "permitted use" as defined by the lease. Instead, the lease represents the grant of a property right giving exclusive possession to the tenant. The grant of exclusive possession means the right for the tenant to exclude all others from the premises. Whatever else may be said about its ability to use the premises profitably, the tenant will still have held this underlying right of possession and therefore exclusion of others, for the relevant period. It is perhaps then not surprising that the Court found that a specific ongoing tenant use could not be anything more than an "expectation" (as it was described) that motivated the parties to enter into the lease. It is also not the case that the landlord itself benefited from the situation – it could not itself (say) have used the vacant premises whilst also demanding rent from the tenant.

Consequently, the circumstances where such an argument might succeed for commercial leases (based upon the Court's criteria) would appear to be very rare. There may be other situations where the outcome is less clear. For example, in the context of licences to occupy property, no right of possession is granted and the language used is often premised upon an entitlement to use for a certain purpose. Another example may be a lease containing a positive covenant on a tenant specifically to use premises for a particular purpose (although most drafting on such matters will, like in this case, pre-allocate risk by virtue of a rent abatement clause).

All of the above will now be considered again by the Court of Appeal, so the outcome on the case's particular facts may (or may not) change, and more importantly the law governing these questions will be open to review.

This case has emerged at a moment when the Real Estate sector is awaiting the publication of legislation which (according to Government press releases) is intended to require landlords to enter into a binding arbitration with tenants, where arrears have accrued in circumstances where the premises or tenants were affected by Covid restrictions. The underlying test for when arrears may be discounted under such an arbitration has not yet been revealed. The Government may, however, be mindful of the fact that this new case, alongside previous Court decisions, has emphasised the robustness of landlord/tenant contractual provisions including the entitlement of the tenant (as well as the landlord) to have insured against risk such as business interruption.

For a detailed analysis of the concept of "failure of basis" and a review of how matters played out in Trocadero, please see this post on our Litigation Notes Blog.

The first instance Court's decision in Trocadero can be found here.

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