Following DTM Legal’s news article in April 2021 when we reported the success of the right to recover rent during the Covid 19 period, two cases were subsequently appealed by the respective tenants and Judgment has recently been handed down. Bank of New York Mellon v Cine-UK Limited & Picture House Cinemas Limited v London Trocadero (2015) LLP [2022] EWCA Civ 1021
The two recent cases were heard together by the Court of Appeal on 21 and 22 June 2022, the Chancellor, Sir Julian Flaux, Lord Justice Snowden and Sir Nicholas Patten had to consider (among other things) whether two tenants of commercial premises had any prospect of successfully establishing a claim in restitution based on unjust enrichment, on the ground that there had been a failure of basis of a severable obligation in their leases. The tenants’ arguments did not prevail. The underlying reason for this is because a lease is more than just a mere contract giving a right to use premises.
The Contractual Nature of Leases
The question of the extent to which contractual doctrine can or should be imported into the law of landlord and tenant has been extensively debated over the years. Historically, although leases were originally regarded as mere personal contracts, outside the feudal landholding system, they came increasingly to be regarded as interests in land. In more modern times, they came to be regarded as a mixture of contract and property. In Linden Garden Trusts Ltd v Lenesta Disposal Ltd [1994] 1 AC 85 at 108H, Lord Browne-Wilkinson described them as a legal hybrid – part contract part property. Increasingly they have come to be regarded as simply a species of contract, notwithstanding the fact that a lease also creates an estate in land.
In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, the House of Lords famously held, by majority, that it was possible for a lease to be frustrated, like any other contract, and that frustration would bring the leasehold estate to an end. In doing so they disagreed with the majority of the Court of Appeal and two members of the House of Lords in Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1943] KB 493.
Applying the “full armoury” of contractual remedies to a lease is not, however, without its difficulties. Two examples serve to illustrate this: the application of the doctrine of repudiation, and frustration itself.
Repudiation
The County Court in Hussein v Mehlman [1992] 2 EGLR 87 reawakened debate as to whether a lease can be brought to an end by a tenant’s acceptance of a repudiatory breach by the landlord. Stephen Sedley QC, later Sedley LJ, said that it could, holding that the decision of the Court of Appeal to the contrary in Total Oil Great Britain Ltd v Thompson Garages (Biggin Hill) Ltd [1972] 1 QB 318 was no longer correct following Panalpina. The Court of Appeal has since assumed on more than one occasion that a lease can be terminated by acceptance of a repudiatory breach. In Chartered Trust v Davies [1997] 2 EGLR 83, it was assumed, without argument, that a lease can end through repudiation and acceptance. In Reichman v Beveridge [2006] EWCA Civ 1659, the Court of Appeal left the point open, noting that there was much to be said either way on the point of principle. In Grange v Quinn [2013] EWCA Civ 24, Jackson LJ said, at [70], that it was now clear that a lease may be brought to an end by repudiation and acceptance but again, the point does not appear to have been argued.
Importing the doctrine of repudiation for breach into a leasehold context does not sit happily with the principle, which has been settled law for centuries, that lease covenants are independent. That is to say, non-performance of one covenant does not excuse performance of another (see eg Yorkbrook Investments Ltd v Batten (1986) 18 HLR 25). The very reason why a landlord reserves a right to forfeit for a tenant’s breach is because non-performance does not give either party a right to terminate the lease.
How does repudiation for breach fit with the landlord’s right of forfeiture and the statutory regime which goes with this? Equity grants relief against forfeiture of property rights – can a landlord circumvent this by accepting a repudiatory breach? And what about a claim for damages? Where an ‘ordinary contract’ is terminated for breach, the innocent party would be entitled to sue for loss of profit for the remainder of the contract, subject to mitigation. It is well established, however, that a landlord who forfeits cannot claim damages for future loss of rent.
Frustration
Difficulties may also arise with the doctrine of frustration. Ordinarily, frustration of a contract brings to an end the obligation on both parties to perform their future obligations. Its effect is prospective only. Frustration of a lease is different, however. It is not merely the contract which ceases to exist for the future; the property interest, which exists independently from the contract, also ceases to exist. In Panalpina there was a contractual relationship between the parties – they were the original landlord and tenant. It is unclear how frustration works where the parties are landlord and tenant by assignment and their relationship is not contractual but arises under privity of estate or the Landlord and Tenant (Covenants) Act 1995.
The tenants’ attempt to rely on a defence of unjust enrichment in the above appeals is a further illustration of why the modern approach, which emphasises the contractual nature of a lease, should not be at the expense of ignoring the proprietary interest which is of paramount significance.
The Appeals
The appeals in Bank of New York Mellon v Cine-UK Limited and Picture House Cinemas Limited v London Trocadero (2015) LLP both raised the issue whether tenants were liable to pay rent for periods of time in the Covid-19 pandemic when, due to the various Covid regulations enacted by the Government, they were precluded from lawfully operating their business as cinema operators from the premises demised to them.
The Appellants were tenants of the Respondent landlords and occupied property on commercial leases which were drafted on standard commercial terms, each for a term of 35 years. In each case the landlord had issued a debt claim for rent arrears which had accrued during the pandemic and had then proceeded to seek summary judgment on the basis that the tenants had no defence. At first instance Master Dagnall, in Bank of New York, and Robin Vos, sitting as a deputy judge of the High Court in Trocadero, rejected the tenants’ arguments and granted the landlord summary judgment.
In both appeals the tenants relied (among other things) on a defence of failure of basis, arguing that the Government restrictions imposed as a consequence of the pandemic caused a total failure of basis in relation to a severable part of the lease.
The Court of Appeal rejected the tenants’ arguments and dismissed the appeals. The defence of failure of basis fell at the first hurdle: the fundamental basis for the obligation to pay rent was not merely the right for the tenant to use the premises lawfully as a cinema but was the demise of the premises and the grant of the right of exclusive possession for a term of years.
The underlying principle of failure of basis is that where C transfers a benefit to D in circumstances where the transaction is subject to a condition (ie a basis) which has not been satisfied, there will have been a failure of basis for the transfer of the benefit, such that C can bring a claim for restitution.
The principal reason for this general rule is that the law should give effect to the parties’ own allocation of risk under the contract. Unjust enrichment has a role where the contract does not operate or has ceased to operate, or where there is a “gap” in the contract.
It was common ground in the two appeals that in order for a claim in unjust enrichment based on failure of basis to succeed, the tenants had to show that the failure was total. The tenants had little prospect of establishing a total failure of basis in respect of whole of their leases: each lease was granted for a term of 35 years and the period of illegality arising by reason of the Covid legislation could be measured in weeks. Neither tenant sought to argue that their leases had been frustrated (although such an argument by another tenant in Bank of New York had been put forward at first instance and dismissed, and in light of the decision in Panalpina would have failed in any attempt to do so. The tenants thus sought to avoid the strict rigour of the total failure requirement by seeking to apportion the basis, ie by saying that the benefit to be provided under the lease, and the rent paid for this benefit, was divisible.
Traditionally, apportionment was only considered to be available where the contract expressly or impliedly provided for apportionment. Recent cases, however, have broadened this approach to the question of apportionment.
The Decision
The Court of Appeal thus had to address these two questions in the appeals: (1) what was the relevant ‘basis’; and (2) whether this could be apportioned. ‘Basis’ is the condition which constituted the ground for the transfer of the benefit to the claimant. In these appeals, it was said that the ‘basis’ was the reason for the tenants’ rental payment, in contrast to the reason for the grant of the lease. The tenants argued that their ability to use the premises lawfully as a cinema was fundamental to the basis of the lease and they cannot have intended to pay rent if they received no benefit; and the landlord cannot have expected to receive rent if the tenants could not use their premises in this way. The demise was of no value to the tenants if it could not be lawfully used at all.
In Trocadero at first instance the deputy judge, concluded that the continued and uninterrupted lawful use of the premises as a cinema was not fundamental to the basis on which the tenant entered into the lease.
Although the Court of Appeal did not seek to emphasise the significance or importance of the fact that the leases created an estate in land, in deciding that the fundamental basis of the obligation to pay rent was the demise for a term of 35 years, they were recognising that a lease is far more than just a contract.
In Bank of New York the failure of basis argument had not been run at first instance. In Trocadero the deputy judge had rejected the argument but had said, obiter, that if he had concluded that there was a failure of basis he would have gone on to hold that the tenant had an arguable claim to say that the leases were severable on a time apportioned basis. The deputy judge did not decide that the leases were severable on a time apportioned basis and that the quarterly rent payments could be apportioned: he was dealing with an application for summary judgement and as such had only to conclude that the tenant had an arguable claim in this regard.
It is suggested, however, that a lease cannot be carved up nor rent apportioned in the way the tenants sought to argue it could be.
The obligation to pay rent
It is now no longer acceptable to say that rent issues out of the land, and thus has an extra-contractual character. A tenant is ordinarily under a contractual obligation to pay rent. This obligation does not, however, detract from the fact that rent is something reserved by the landlord out of the grant of the lease. A landlord who has reserved a rent has a right to receive rent from its tenant whether or not there is also a contractual obligation reinforcing this right. The tenant, while it remains the tenant, is liable to pay the rent even in the absence of a covenant to do so. This is the basis on which a subsequent tenant is liable on any of the lease covenants. Section 205(1)(ix) of the Law of Property Act 1925 recognises rent as an incorporeal hereditament. It is payable by the tenant from time to time and payable to the landlord from time to time.
Rent might be payable in instalments, but rent is consideration for the estate as a whole and is not, by its nature, apportionable. As Peter Smith J said in PCE Investors Limited v Cancer Research UK [2012] EWHC 884, at [49], and as followed by Morgan J in Marks & Spencer plc v BNP Paribas [2013] EWHC 1279 (Ch) at [42] to [45], it is not appropriate to divide up a single consideration.
Conclusion
A lease contains covenants which, in origin are contractual, and in many ways a lease can be regarded like any other contract. For example, the ordinary principles of contractual interpretation apply to leases and a breach can be enforced by specific performance or give rise to a claim in damages. But a lease also creates an estate in land and this fact is significant, not least because unlike mere contractual rights, property rights have the potential to affect third parties. There are rules which apply to leases which do not apply to other contracts, often reflecting the medieval origins of the law of landlord and tenant: thus a lease, unlike other contacts, must have a term certain.
A lease is fundamentally more than a mere contract: it creates an estate in land. A lease can be created without any contract at all and with neither party promising to do anything. The covenants are in addition to the creation of the estate. The contractual obligations go with the estate and are dependent on the continuation of the estate granted – this is why a landlord who forfeits cannot claim damages for future loss of rent. The obligation to perform the lease covenants is dependent on the continuation of the estate: if the estate ends, the contractual liability to perform the covenants ends. But the estate doesn’t depend on the contract. The legal estate has an existence which is independent to the contract which created it – this is why an assignment of a lease, even in breach of contract, is effective to vest the lease in the assignee. The reason why contractual remedies such as termination for repudiation and remedies such as failure of basis and even frustration create difficulties is precisely because the covenants in a lease are associated with an estate in land.
It is now beyond question that the doctrine of frustration applies to leases, but it applies in such rare cases that there are still no decided cases where the court has decided that a lease has been frustrated. The question whether a lease can be terminated for repudiatory breach remains to be authoritatively determined, albeit most practitioners now accept that the doctrine does apply to a lease and operates to determine both the contract and the estate in land.
Will there ever be any room for the doctrine of failure of basis to apply to a lease? It is difficult to envisage a situation where the demise itself, the grant of the term of years, will not be the fundamental basis of the lease. The basis for the grant of a lease must surely always be the grant of the estate: this is the essence of a lease. It is also difficult to envisage when there might be a total failure of basis which would not also be capable of constituting a frustrating event. The strict requirement that a failure of basis must be total would require a total failure of the estate, which would undoubtedly be a frustrating event. And because the estate is granted whole, at the start of the lease, it does not accrue from day to day: a lease is not a contract that is ‘apportionable’.
For advice on Leases, Frustration, Obligations and Landlord issues please contact Anna Duffy at anna.duffy@dtmlegal.com
