Bank of New York Mellon (International) v Cine-UK Limited  EWCA Civ 1021
August 4, 2022
London Trocadero (2015) LLP v (1) Picturehouse Cinemas Limited (2) Gallery Cinemas Limited (3) Cineworld Cinemas Limited EWCA Civ 1021
Before Sir Julian Flaux Chancellor of the High Court, Lord Justice Snowden and Sir Nicholas Patten
The Court of Appeal has dismissed the appeals brought by tenants of commercial properties against summary judgments in favour of their landlords that the tenants were liable to pay rent for periods when they were unable to lawfully operate their businesses due to the Coronavirus Regulations.
The landlord in the first appeal is Bank of New York Mellon (International) Limited and the tenant is Cine-UK Limited, which operates a cinema complex out of a shopping centre in Hengrove, Bristol. This was referred to in the judgment of the Court of Appeal as the “Hengrove appeal”.
The landlord in the second appeal is London Trocadero (2015) LLP. There are three defendants, all of which form part of the same group; the first defendant is the tenant of the premises at Trocadero, London from which it operates a cinema complex; the second defendant was the original tenant under an earlier lease and the third defendant is the guarantor under both leases. In the judgment of the Court of Appeal this was referred to as the “Trocadero appeal”.
The grounds of appeal
In the Hengrove appeal it was argued that, (1) the tenant was relieved from its liability to pay rent by virtue of the rent cesser clause and that it was wrong to construe that clause as only referring to physical damage, (2) it was wrong to reject that a term should be implied into the lease to relieve liability to pay rent for the periods when the premises could not be occupied, (3) that it was wrong to conclude that there had not been a partial failure of consideration which would operate as a defence to pay rent otherwise due.
In the Trocadero appeal it was argued that, (1) the judge had been wrong to conclude that there had been no failure of basis as the ability to use the premises as a cinema was fundamental to the leases, and there was a “gap” to fill in the leases and that a claim in unjust enrichment was consistent with the terms of the leases, (2) the judge had been wrong to conclude that the implied term was not necessary to give business efficacy to the leases or were so obvious as to go without saying.
Judgment of the Court of Appeal
Effect of rent cesser clause
As to the rent cesser clause in the Hengrove lease, the Court of Appeal held at §126 that on the “natural and ordinary meaning” of the words of the clause, it operated only where the property had become unfit for occupation following physical damage or destruction. It was held that the property was not a legal entity and therefore could not suffer financial or economic damage. Such damage could only be suffered by the Hengrove tenant and the cesser clause made clear that the damage had to be to the property, not to the tenant’s business. It was further held that whilst the insurance taken out by the Hengrove landlord did protect against loss of rent “resulting from interruption of or interference with the BUSINESS” following an outbreak of disease, that indemnity was strictly in relation to the landlord’s business as a property owner. The Court of Appeal held that the Hengrove tenant could have taken out business interruption insurance which included cover for pandemics, but it had not done so. The Court of Appeal therefore dismissed the ground of appeal founded on the rent cesser clause, see §126-134 of the Judgment.
The second ground of appeal which fell to be considered was in relation to whether terms could be implied into the leases which would alleviate liability to pay rent in the event that the premises became unfit for occupation. In both appeals it was held that this was an attempt to imply far broader cesser of rent provisions than were provided for in the leases, see §§135-136. In rejecting this ground of appeal in both cases, the Court cited the summary of the legal principles by Carr LJ in Yoo Design Services Limited v Iliv Realty Pte Limited  EWCA Civ 560 (“Yoo Design”), at §55 of the Judgment. In Yoo Design, Carr LJ set out that there are two tests either of which must be fulfilled in order for term to be implied; the business efficacy test (on an objective assessment of the terms of the contract, the implied term is necessary to give business efficacy to the contract) and the obviousness test (where the implied term is so obvious it goes without saying). Importantly, Carr LJ held that a term should not be implied into a detailed commercial contract simply because it would be fair to do so, “The test is one of necessity, not reasonableness. That is a stringent test”, see §55(viii).
As to the business efficacy test, the Court of Appeal held that the leases in both appeals did not lack commercial or practical coherence in the absence of the implied terms. It was held that the leases had considered the need to allocate risk and provided that the tenants would remain liable to pay rent where the specific terms of the rent cesser provisions were not met.
Likewise in relation to the obviousness test the Court of Appeal found that this was not made out on the facts of each case. At §142 the Court held that the second implied term in the Trocadero appeal was “completely unworkable” since the question of implication had to be addressed at the time the contract was made. This would have required expert evidence which was not available and would likely have been disputed and therefore subject to cross-examination; none of which could be consistent with the implication of a term.
The ground that there had been a failure of basis was also rejected by the Court of Appeal, relying on the principles set out by Carr LJ in Dargamo Holdings Limited v Avonwick Holding Limited  EWCA Civ 1149 (“Avonwick”) and in particular the “Obligation Rule”; essentially that a claim in unjust enrichment cannot succeed where the payee was entitled to the sum paid to them. Whilst the Obligation Rule was not absolute, it was held in Avonwick that it would only be in rare cases where unjust enrichment was necessary to fill a “gap” in the contract.
On that basis it was held that there was no “gap” in the leases that needed to be filled by the law of unjust enrichment. The leases subject to the appeals were detailed and had clearly expressed the allocation of risk. It was held that the consideration for the requirement to pay rent was “the demise of the premises for, in each case, a 35-year term, giving the tenant exclusive possession”. Since this was the basis of the obligation to pay rent in both appeals, that obligation could only be relieved where the cesser of rent clauses applied, in the Court of Appeal’s judgment the terms of the leases meant such clauses only applied where physical damage or destruction occurred.
The Court of Appeal further found at §154 that the fact that the only permitted use under the lease is as a cinema did not change the allocation of risk. In Hengrove the lease provided for the tenant to change the permitted use with the consent of the landlord. In Trocadero, the tenant had covenanted that they would comply with any statutory obligations in respect of the premises. The risk that the premises could not lawfully be used because, as in these cases, of the Coronavirus regulations, rested squarely on the tenants. The failure of basis argument was therefore rejected and both appeals were dismissed.
This decision is of note to a wider audience than merely those with an interest in commercial property.
The Judgment re-affirms the position that a term will not be implied into a detailed commercial contract because it is fair, and that the test is one of necessity, not reasonableness. Terms will only be implied either to give business efficacy to the contract or where the term and its precise expression is so obvious that it goes without saying. This is a high threshold to satisfy, and the Court of Appeal has confirmed that the test is a “stringent” one.
The Judgment also highlights the difficulties in advancing the argument of failure of basis where contracts remain live, with many years to run. The Court of Appeal has confirmed that it will only be in rare cases where a failure of consideration could be made out despite the existence and performance of a valid contract. One such example would be where the law of unjust enrichment was required to fill “gaps” in the contract; this case demonstrates that where there exists a carefully drafted and detailed commercial contract it will be a high hurdle to convince the court that the case falls within the rare category that would justify a departure from the Obligation Rule.
28 July 2022