The Court of Appeal, in the conjoined appeals of London Trocadero (2015) LLP v Picturehouse Cinemas Ltd and Bank of New York Mellon (International) Ltd v Cine-UK Ltd, once again vindicated beleaguered landlords by refusing to imply terms into professionally negotiated leases.  Tenants cannot withhold rent except in circumstances expressly set out in the lease.   

Buttressing the judgment is the reiteration of the stated “fundamental basis” of a lease: it is an estate granting exclusive possession for a fixed term, in consideration for payment of rent. The tenants’ frustrated intention to use the premises as a cinema was not sufficient to cause a total failure of consideration.

Background

The defendant tenants are both part of the troubled Cineworld Group plc, which is the second largest cinema operator in the world. The appeals related to whether they remained liable to pay rent when COVID-19 restrictions required them to close their cinemas. The landlords pursued the defendants for arrears incurred during this time, and, because there was no basis in law for the tenants’ defence, the landlords successfully applied for summary judgment.  That first instance decision gave rise to this appeal.   

The Arguments

The tenants put forward the following arguments:

  • COVID-19 restrictions caused a “failure of basis”, which should therefore give rise to a restitutionary claim against the landlords. The tenants had had no benefit from the contract during this time and therefore, they argued, if they did pay rent, the landlords would unjustly benefit from its receipt; 
  • a term should be implied into the leases that the obligation to pay rent would be suspended when the lawful use became impossible; and
  • in respect of one of the leases, that the tenant were relieved of their obligations to pay rent by the rent cesser clause in the leases.

A strong Court of Appeal firmly rejected all three arguments.

Unjust enrichment

This was an audacious defence for the tenants to raise.  Unsurprisingly, the court preferred to maintain the status quo rather than extend radical restitutionary principles to undermine established property rights.

It restated that a lease was a contract whereby the tenant was granted exclusive possession, for a term, at a rent.  The COVID-19 regulations did not alter this basis.  The jointly held knowledge at the grant of the lease that the tenant would use the premises for a cinema was immaterial; to suggest that the landlords had unmeritoriously benefited by continuing to demand rent when the tenants could not run their business, was to impose the alien idea that the landlords and the tenants had agreed to share a commercial risk.

In addition, one of the leases permitted change of use with the landlord’s consent and therefore contemplated an alternative use to a cinema. The other lease specifically stated that the landlord gave no reassurance that the premises could actually be used as a cinema, and the same lease also contained a tenant covenant to comply with statute. The allocation of risk was therefore again laid upon the tenant; a statute might prevent it from being able to use the premises, but the rent obligation remained.

Rent Cesser

Under the rent cesser clause in one of the leases, rent was to be suspended where the premises were destroyed or damaged so that the tenant was unable to occupy or use the premises.  

The tenants’ argument was that damage could be financial and not just physical. The sole permitted use under the leases was as a cinema. The rent cesser therefore provided for rent to be suspended where government restrictions “damaged” the premises by making them unfit for cinema use.

Again, the court found against the tenants and held that this was a distortion of the natural meaning of words.  Words should be given their natural and ordinary meaning.  “Damage” meant physical damage, and this was underlined by the juxtaposition of “damage” with “destruction”.

Later wording in the clause purportedly supported this interpretation, affirming that such cesser would continue until the premises were rebuilt or reinstated so as to again be fit for occupation and use.  If this was impossible within a three year period, then there was the right for the tenants to terminate the leases. Only physical damage requires rebuilding or reinstatement.  Further, an estate in land such as a lease has no legal personality and therefore it cannot suffer consequential financial damage.

Implied Terms

The tenants advanced a further bold argument, that there should be a term implied into the leases that for any period during which the permitted use became illegal, the obligation to pay rent should be suspended.

Last year, the Court of Appeal restated the law on the implication of terms into professionally drafted documents, namely that:

  • this should only be done where it is necessary to give business efficacy to the contract, such that the contract would lack commercial or practical coherence without it; or
  • the necessity for implication is so obvious that it goes without saying.

As the leases worked without the requested terms being implied, the tenants’ argument was rejected.  The suggestion that landlords would have automatically have agreed to a rent suspension if the possibility of the COVID-19 situation had been raised during negotiation of the leases was unrealistic.

A key focus of the judgment was the allocation of risk. To imply the terms the tenants were suggesting would contradict the express terms of the leases and reallocate the risk bargained for between the parties.

Conclusion

The Court of Appeal has once again demonstrated its reluctance to depart from long established land law principles, and again shown why England and Wales is an excellent place for property investment.  Even an event as novel as a global pandemic will not displace an innate conservatism to develop the common law only incrementally, based on established legal principles.

This is one of a series of cases arising out of the COVID-19 pandemic, which has illustrated how English courts value certainty and precedent over short term alleviation of purported unfairness.  From a landlord’s perspective, this is in welcome contrast with certain European countries where leases have been deemed to have been frustrated, or state-sponsored rent holidays have been imposed. 

It would be inaccurate to brand the English courts as always “landlord friendly” in relation to commercial leases. However, despite unparalleled world events, they have shown awareness of larger economic and political concerns, using common law precedent as a robust mechanism to achieve this. 

Post Script

This judgment may sadly prove to be a pyrrhic victory for the landlords.  Cineworld Group plc, has already filed under Chapter 11 for bankruptcy in the US.  Whilst it denies that it is planning insolvency measures in the UK, its share price has fallen dramatically such that restructuring or sale may be the only long term solution and, from a landlord’s perspective, restructuring laws offer less protection than they would like.

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For any other legal questions related to UK real estate, please get in touch with your usual Mayer Brown contact or one of the blog editors.

When acquiring a property for development, covenants that restrict the type or form of development always need to be carefully considered. There are a number of ways in which restrictive covenants can be addressed, and in two recent cases developers sought to have the relevant restrictive covenants discharged following the grant of planning permission.

The power to modify or discharge

Section 84(1) of the Law of Property Act 1925 grants the Courts the power to wholly or partially modify or discharge restrictive covenants where the applicant can prove one of the following grounds:

  • Ground (a) – established where the Court considers that changes in the character of the property or the neighbourhood or other circumstances that the Court may deem material means that the restriction ought to be deemed obsolete.
  • Ground (aa) – established where the continued existence of the restrictive covenant would impede some reasonable user of the land for public or private purposes. In applying Ground (aa), the Court must be satisfied that the restrictive covenant (i) does not secure to the persons entitled to the benefit of it any practical benefits of substantial value or advantage to them; or  (ii) is contrary to the public interest.
  • Ground (b) – established where the beneficiary of the restrictive covenant has agreed, either expressly or by implication, to the same being discharged.
  • Ground (c) – established where the Court finds that the proposed discharge or modification will not injure the persons entitled to the benefit of the restrictive covenants.

HAE Development Ltd v The Croft Ealing Ltd [2022] UKUT 120 (LC)

The development site in the HAE Development Ltd v The Croft Ealing Ltd [2022] UKUT 120 (LC) case was subject to restrictive covenants from 1955 which prevented the building of more than one dwelling house on the site and restricted other uses that would cause a nuisance or annoyance to the objectors. The developer had obtained planning permission for the construction of eight flats and then applied to have the restrictive covenants discharged citing grounds (a), (aa) and (c) above.

The Court found in favour of the applicant; making out all three grounds.

Ground (a) – the objectors argued that the purpose of the restriction was to preserve the neighbourhood as an area of houses rather than flats and that such a purpose could still be achieved by retaining the restrictive covenant. However the Court found that as the neighbourhood had changed considerably since 1955, including many buildings being converted to flats (including the property owned by the objectors) the purpose was “entirely superfluous”.

Grounds (aa) and (c) – the Court considered the questions established in Re Bass [1973] P&CR 156:

Is the proposed use reasonable? As the proposed development had been through the scrutiny of a thorough planning process, the Court found that the proposed use was reasonable.

Do the restrictions, in impeding development, secure a practical benefit for the objectors? The objectors raised a number of prejudices that they claimed would be caused by the proposed development, including the adjoining land being overlooked and the impacts of intensification of user. The Court found that the drafting of the restrictive covenants was not specific enough to afford the objectors any “advantage” in not being overlooked – the development of a single dwelling house, as permitted under the restrictive covenants, would also have the potential to cause the same injury. The Court found that the other prejudices raised were dealt with by the conditions to the planning permission.

Specifically considering Ground (aa), the Court found that the restrictive covenants would impede development for a reasonable use of the land for housing and did not secure the objectors any practical benefit.

Mill Strand Developments Ltd v Tapp and Ors [2022] UKUT 143 (LC)

The second development site in Mill Strand Developments Ltd v Tapp and Ors [2022] UKUT 143 (LC) was subject to a 1972 restrictive covenant not to erect any structures that were not of an agricultural nature, which was aimed at protecting the value of the then recent residential development of the adjoining land. The developer had obtained planning permission for the construction of five detached houses and applied to discharge the restrictive covenant pursuant to grounds (c) and (aa).

Again, the Court found in favour of the applicant.

Ground (aa) – as before, the Court first considered the questions established in Re Bass. It was again held that since the proposed development had been through the “scrutiny” of the planning process it was a reasonable use for the land.

Whilst the Court found that the restrictive covenant did confer some practical benefit on one of the objectors, as the development would disrupt their current “rural view over undeveloped land”, they did not find that practical benefit to be substantial, concluding that if the land remained undeveloped it would most likely turn to scrub land that would have no economic value and would not be particularly attractive. The court found that £25,000 would be adequate to compensate the one objector who took some practical benefit from the restriction.

Ground (c) – this ground was not considered further by the Court as it had already found that the discharge of the restrictive covenant would cause injury to one of the objectors.

Conclusions

In the two cases considered in this article, the Courts have shown a willingness to discharge restrictive covenants where they consider that the proposed development has been through sufficient scrutiny through the planning process to deem the proposal to be reasonable. The Courts were critical of arguments from objectors focused on personal gain and injury where there is a wider public benefit to the developments being considered – the Courts have taken a very practical approach.

Development sites almost always include elements of risk – it is often the existence of development constraints that create the greatest potential value if the constraints can be dealt with. A lot of developers consider insurance as the best way to address restrictive covenants. However, the availability of the Court’s powers to discharge or modify such restrictive covenant should also be considered and these cases are helpful in providing additional guidance and a reminder of the availability of this option.

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For any other legal questions related to UK real estate, please get in touch with your usual Mayer Brown contact or one of the blog editors.

Introduction

Reform of the regime governing residential long leaseholds (leases of dwellings for a term of twenty one years or more) has been going on for over fifty years.  The latest reform is to restrict a landlord’s ability to charge ground rent on top of an initial premium paid on the grant of the lease.  Ground rent is a sum the tenant pays annually, in addition to the lump sum for the lease itself.  Unlike insurance rent and service charges which the tenant must also pay, ground rent is seen as an ongoing windfall for the landlord, as it is not referable to provision of a service.

Continue Reading Leasehold Reform (Ground Rent) Act 2022

Following the introduction of the Government’s Levelling Up and Regeneration Bill  to the House of Commons on 11 May 2022, we follow up on our article Levelling Up – Government to play matchmaker on the high street? with an overview of the proposed legislation.

In brief, the Levelling Up and Regeneration Bill  (the “Bill”) establishes a statutory notice procedure to be followed by local authorities before a rental auction can be carried out and the landlord required to grant a short-term tenancy to the “successful bidder”.

Continue Reading Levelling Up and Regeneration Bill – High Street Rental Auctions

Last week the UK Government published its long-awaited proposals for reform of the planning system in England and Wales, in the Levelling-Up and Regeneration Bill.

Back in June 2020, radical reforms to the planning system were proposed, including introducing zoning and deemed planning permission in designated growth areas.  Despite the abandonment of these far-reaching reforms, the proposals set out in the Bill, are significant.  The main changes are as follows.

Central Government will take a much greater role in planning

This will be achieved by the introduction of a new suite of National Development Management Policies which will set out generic planning policies applicable across the country.  Local Plans will be expected to restrict themselves to purely local issues.  The expectation is that this will provide greater consistency in decision-making and help with the speedy production of up-to-date Local Plans.  This is backed by a new statutory provision to the effect that applications are to be determined in accordance with the Local Plan and National Development Management Policies and if there is a conflict between the two, national policies will prevail.

This is a significant cultural shift from the position to date under which locally-determined policies should prevail.  There is also some scepticism about the production of a whole new suite of national policies: is this a return to the days of PPGs which were swept away on the grounds that these were too unwieldy and bureaucratic?

Continue Reading Levelling Up and Planning Reform

The Government’s recent Levelling Up the United Kingdom White Paper announced the intention to give local authorities the power to require landlords to rent out long-term vacant properties on the high street to tenants such as local businesses and community groups. This is primarily targeted at addressing the social problems associated with high streets that have high vacancy rates. Very little detail has so far been announced and we await the release of the Levelling Up Bill after the Queen’s Speech on 10 May 2022.

In this article we will consider some questions arising out of the White Paper, and we will follow up on the detail once the Bill is released.

Continue Reading Levelling Up – Government to play matchmaker on the high street?

Introduction

From the Domesday Book of William the Conqueror, to the establishment of the Land Registry, identifying the owner of a piece of land has had a long history in the UK.  Whilst William wanted to know the extent of his conquered lands so he could tax his new subjects, and land registration was introduced to make conveyancing and mortgages easier, the Economic Crime (Transparency and Enforcement) Act (the “Act”) has a more high minded purpose.  It is intended to make public the “real” identity of foreign proprietors owning land in the UK and thus discourage bad actors from investing in English real estate.

Continue Reading The Economic Crime (Transparency and Enforcement) Act: what to expect

After a long period of uncertainty, HMRC have finally issued their decision as to whether or not valued added tax (“VAT”) is chargeable on dilapidations payments.

Historically, dilapidations payable by a tenant at the end of a lease had not been subject to VAT.  The payment was to compensate the landlord for having its premises returned in disrepair, contrary to the tenant’s promise to keep them in repair.  Truly compensatory payments have historically been treated as not subject to VAT as it was considered they were not payments for a supply of goods or services.

Continue Reading As you were! HMRC decides no VAT payable on dilapidations payments after all

The tragic events in Ukraine have caused Western governments to take various steps to cause economic damage to the Russian state, Russian companies and Russian nationals. In coordination with other governments, the UK Government has imposed escalating sanctions, which we are tracking here.

As part of this approach the UK Government has also brought forward the publication of the Economic Crime (Transparency and Enforcement) Bill (the “Bill”) – indeed Prime Minister Boris Johnson said that “There is no place for dirty money in the UK. We are going faster and harder to tear back the façade that those supporting Putin’s campaign of destruction have been hiding behind for so long. Those backing Putin have been put on notice: there will be nowhere to hide your ill-gotten gains.”

Continue Reading The new economic crime bill – greater transparency of property ownership in the UK?

At last we have some clarity on the shape of the statutory arbitration scheme, which deals with the rent arrears – including service charges and interest – built up by businesses forced to close or restrict their activities during the pandemic (“protected rents”).

Continue Reading The Commercial Rent (Coronavirus) Bill: more uncertainty for landlords