Covid and the implication of terms
Bank of New York Mellon v Cine-UK and London Trocadero v Picturehouse Cinemas (Court of Appeal) [2022]
Covid and the resulting governmental lockdown restrictions had a major impact on many commercial contracts. We have previously reported on various High Court decisions on these topics. We now have the benefit of Court of Appeal judgments in two of the cases.
Facts:
In both Bank of New York Mellon v Cine-UK ( http://www.trglaw.com/news342.html) and London Trocadero v Picturehouse Cinemas (http://www.trglaw.com/news329.html) the respective tenants (T) sought unsuccessfully to resist their respective landlords' (L) claims for rent for periods when the Covid 19 pandemic meant the leased premises could not be used as cinemas.
T argued that it was an implied term that they should not be liable to pay for periods when the premises could not be used for their intended purpose and that there was ‘failure of basis’ which relieved T of the obligation to pay rent. In one case the T also argued that the rent cessation clause in its lease extended to financial or non-physical damage.
In both cases L was granted summary judgment by the High Court. The T’s appealed. The appeals were heard together
Decision:
Both appeals were dismissed. The Court of Appeal held that: The implied terms argued for by the T’s (essentially for the suspension of rent payments during the period when the permitted use was illegal) satisfied neither the business efficacy test or the obviousness test. Both leases worked perfectly well without the implied terms and did not lack commercial or practical coherence without them. Both leases allocated to the tenant the risk that the premises could not be used for their intended purpose where the express rent cessation clause was inapplicable. The wording of the terms to be implied were not obvious and would have been hotly contested. The implied terms were also said to be 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. Where, as here, the contracts in question were detailed documents prepared by lawyers, the judge reiterated that the scope for implication of terms is limited.
The court said that even if one accepted that the pandemic restrictions were unprecedented (which the court said was debatable), that was not a reason to disregard or disapply fundamental principles of contract law or to extend the law of unjust enrichment.
Failure of basis could very rarely be made out when a valid contract existed and was being performed. One possibility was where unjust enrichment filled a gap in the contract. The judge maintained that here there was no "gap" in the leases that required filling by a claim of unjust enrichment. The leases contained a considered contractual regime setting out the circumstances in which the obligation to pay rent would be suspended and allocating risk. The failure of basis claim would subvert that regime and contradict the lease provisions.
The correct interpretation of a rent cessation clause in the Bank of New York Mellon lease required physical damage and it did not include financial or non-physical damage of the nature caused by the pandemic restrictions. This was not surprising since the clause in question required “the Property [to be] destroyed or damaged by the Insured Risks so as to render the Property unfit for occupation or use”. The judge said that according to their natural and ordinary meaning, those words were only apt to describe unfitness caused by physical damage or destruction particularly as the clause went on to talk about rebuilding or reinstatement of the property.
Points to Note:
- The judgment of the Appeal Court is fairly conclusive and leaves little room for further argument even if its conclusions are, in almost all respects, fairly harsh on the tenants. The court concluded that there was no lacuna or vacuum in the leases. Can it really be said that when the leases were being drafted, the lawyers involved deliberately decided to allocate risks of government lockdowns to the tenants? No doubt leases and other contracts in the future will focus expressly on the potential impact of governmental lockdown restrictions.