Covid restrictions, leases and failure of basis

London Trocadero (2015) LLP v Picturehouse Cinemas Ltd ([2021] EWHC 2591 (Ch)) concerned a claim that a tenant of premises let as a cinema was relieved from the obligation to pay rent in respect of periods when lockdown restrictions meant that the cinema had to be closed down.

The claim was based on an alleged implied term and on the argument that there was a failure of basis during the lockdown periods. The tenant did not argue that the lease was frustrated.

Facts

The lease in question specified that the property could only be used as a cinema. There was a keep open clause requiring the tenant to operate the cinema throughout the lease term. It also contained a clause to the effect that the landlord gave no warranty that the demised premises could lawfully be used as a cinema.

The implied term argument

The tenant argued that there was an implied term that the obligation to pay rent was suspended in respect of periods when it was illegal to use the premises as a cinema and / or the level of trade was below that anticipated by the parties when the lease was granted ([55]).

The judge (Robin Vos sitting as a Deputy Judge of the High Court) adopted Carr LJ’s summary of the law of implied terms in Yoo Design Services Limited v Iliv Realty Pte Limited ([2021] EWCA Civ 560 at [61]).

The suggested implied terms were not ‘so obvious that they go without saying’ nor ‘necessary to give the leases business efficacy’ ([67]). The implied terms would impose a commercial risk on the landlord and there was no reason for the court to intervene in this way ([72] and [75]).

The fact that the lease expressly provided there was no warranty that the premises could lawfully be used as a cinema cast further doubt on the argument for an implied term ([78]). Similarly, the clause for suspension of rent could have been made to apply to this situation but did not ([79]).

The second part of the suggested implied term was too uncertain ([80]).

The failure of basis argument

The following explanation of the elements of a failure of basis claim was explained:

‘a benefit has been conferred on the joint understanding that the recipient’s right to retain it is conditional. If the condition is not fulfilled, the recipient must return the benefit. The condition might take one of a variety of forms. For instance, it might consist in the recipient doing or giving something in return for the benefit … Alternatively, the condition might be the existence of a state of affairs, or the occurrence of an event, for which the recipient has undertaken no responsibility.’

(Goff and Jones, The Law of Unjust Enrichment, (9th ed) at [12-01])

Failure must be total (Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Limited [1943] AC 32 at [77] per Lord Porter).

Where there is a subsisting contract, the claim must be consistent with the terms of the contract and must not interfere with the contractual allocation of risk between the parties (Dargamo Holdings Limited v Avonwick Holding Limited [2021] EWCA Civ 1149).

The failure of basis claim failed here because the use of the premises as a cinema was not fundamental to the basis of the lease. The clause providing that the landlord did not warrant that the premises could lawfully be used as a cinema was important in reaching this conclusion ([123]) as was the fact that the suspension of rent clause was not triggered by the lockdown restrictions ([130]). The failure of basis claim would be inconsistent with the terms of the lease ([132]).

Use as a cinema could be fundamental, it depends on the terms of the lease ([126]). The claim could not be defeated just by the argument that the tenant still had possession of the premises ([137]).

That said:

‘the default position is that, in the case of a lease, an inability to use premises for the intended purpose is unlikely to constitute a failure of basis as it may be relevant to the presumed allocation of risk between the parties. However, there can be no general rule. Each case will depend on its own facts.’ ([141]).

Since failure of basis has to be total, the claim could only succeed if the lease was severable. The argument could then be made that there was a total failure of basis in respect of those periods during which the premises could not be used as a cinema.

The lease could be severed in this way. The lease provided for an apportionment of rent for other purposes and this supported a similar severability for this purpose ([158]). If the failure of basis claim was available, the lease could be severed ([159]).

Michael Lower

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