Property litigation weekly update - 1 October 2021
In this week's bulletin, the team discusses Covid-19 and commercial rent arrears, expert valuation evidence in 1954 Act cases, the latest in the CMA investigation into onerous ground rents and the unsuccessful landlord challenge to the Caffe Nero CVA. All this along with some positive news and insights from across the firm.
Covid-19 and commercial rent arrears: London Trocadero (2015) LLP v Picturehouse Cinemas Limited and others 
In London Trocadero (2015) LLP v Picturehouse Cinemas Limited and others  the Court once again grappled with inventive defences in the Covid-19 landscape.
The claimant/landlord, London Trocadero (2015) LLP, brought a claim against the defendants, the current tenant, original tenant and guarantor, for unpaid rent and service charge arrears in excess of £2.9 million, said to be due under two leases of the cinema at the iconic London Trocadero centre in London.
This case is one of a number of high profile commercial rent arrears cases that have come before the Courts in recent months in which tenants have put forward a variety of creative defences prefaced on the fact the pandemic was an unprecedented, unforeseeable event which ought to shift the Court's approach. However, in all those prior cases, the Courts have found in favour of the landlords.
The defendants in this case put forward three defences:
- Implied term
The defendants argued that terms should be implied into the leases to the effect that payment of rent and service charges should be suspended during any period for which the use of the premises as a cinema was illegal, and/or during periods where the attendance level would not be at a level commensurate with that which the parties would have anticipated.
The Court rejected this argument on the basis such implied terms were neither required to give "business efficacy" to the lease, nor were such terms "so obvious that they go without saying". The fact the landlord had explicitly not given a warranty as to legality of the use of the premises, and that there was a clause dealing with rent suspension in certain circumstances, illustrating the parties had broadly considered the issue, was taken into account by the Court.
- Failure of basis
By this defence, a concept seen in unjust enrichment cases, the defendants argued payments due under the leases were for the use of the premises as a cinema, therefore where that use was not possible, no payments were due for those periods.
The judgment provides a detailed and useful overview of the case law in this area. Ultimately, the Court concluded there had not been a failure of basis, as the use of the premises as a cinema is not "fundamental to the basis" on which the parties entered into the leases.
Despite this decision, the judgment also deals with issues which were raised in relation to this strand of the defence, namely (a) whether the leases are severable, and (b) whether failure of basis can be a defence to a contractual claim in principle, which might provide useful reference for future claims seeking to raise the defence of failure of basis.
- Set off
The final argument was of a more practical than legally imaginative nature. The first defendant brought a counterclaim for alleged overpayments of insurance sums of £621,000 and argued these ought to be off-set against the sums claimed.
The Court considered whether the wording in the lease "without deduction" prevented this defence, however concluded the case law showed such wording (in the absence of specific reference to set-off) could not exclude an equitable right to set-off. The Court therefore found in favour of the tenant on this point and, on granting summary judgment to the claimant, reduced the sums due by £621,000. It is worth noting that most modern commercial leases exclude a tenant's right of set-off against rent and other payments due under the lease.
While we await legislation regarding the proposed new arbitration scheme (which has been the subject of comment in a number of our recent bulletins), it is clear that the approach of the Courts when deciding arrears cases has not changed.
Expert valuation evidence in 1954 Act cases WH Smith Retail Holdings Ltd v Fort Properties Ltd 
The case of WH Smith Retail Holdings Ltd v Fort Properties Ltd clarifies the rules on expert valuation evidence in lease renewal proceedings. The Defendant, who was the landlord of commercial premises in North London, made an application to strike out various passages in the Claimant's expert valuation report on the basis that it contained inadmissible information.
The tenant had a 5 year lease and remained in occupation after contractual expiry, holding over under the Landlord and Tenant Act 1954 ("the Act"). The landlord served a section 25 notice on the tenant opposing renewal of the tenancy on the ground that it intended to carry out development works to the property. Proceedings for a new tenancy were issued by the tenant in June 2017 but were later discontinued. The tenancy came to an end on 21 May 2020.
Further proceedings were then issued by the tenant in relation to the level of interim rent that ought to be paid between 25 December 2017 (being the earliest determination date which might have been specified in the section 25 notice) and 21 May 2020.
The Interim Application
As is common where the level of rent cannot be agreed, each party was given permission to rely on its own expert valuation evidence.
The interim application was made by the Defendant on the basis of 3 alleged issues:
- The Claimant's expert had referred in her report to PACT (Professional Arbitration on Court Terms) decisions and those decisions are confidential and inadmissible;
- The Claimant's expert's use of disclosed material did not comply with the rules for using those documents as set out in CPR 31.22; and
- The Claimant's expert's report contained legal submissions.
It was for the Court to decide whether to strike out various passages of the report and / or joint statement between the two experts.
The Court's Decision
His Honour Judge Monty QC ultimately dismissed the Defendant's application and declined to strike out any part of the Claimant's expert report.
Dealing with the admissibility of the PACT decisions, it was held that the Claimant's expert was not relying on them for valuation purposes, instead using them to support her assumptions and methodology. In relation to confidentiality, the Claimant's expert made clear in her witness statement responding to the application that PACT determinations are "widely circulated among valuers engaged in lease renewals and rent reviews to the point that they have ceased to be private".
The Court indicated that it would not be appropriate to strike out "parts of an expert report…where the applicant had not taken me to any authority on the preservation of confidentiality which, as a matter of fact, are in the public domain and are openly referred to".
On whether legal submissions had been included, while the Court reiterated that an expert's duty is to the Court rather than to a party, it indicated that it is not controversial for an expert to set out their opinion in a report. Having considered each alleged legal submission the Court held that the Claimant's expert's motive for each reference was to explain why a relevant assumption had been made.
Finally, the Defendant's objection on the basis of CPR 31.22 also failed. CPR 31.22 provides that a party to whom a document has been disclosed may use that document only for the purposes of the proceedings for which it has been disclosed, subject to some exceptions. As the relevant documents were not disclosed by the parties as part of the disclosure exercise, it was held that CPR 31.12 had no application here.
Although the application was unsuccessful, this decision underlines the care that experts (and those assisting them) must take to ensure that their approach does not lay them open to criticism and potentially costly satellite disputes.
The removal of onerous ground rents
The Competition and Markets Authority (CMA) opened an investigation into potential breaches of consumer protection law in the leasehold housing market on 11 June 2019.
The focus of the investigation has been the ground rents charged under new build leases, where in many cases the rents double every 10 years creating a potentially onerous burden. These rents have in some cases meant that properties have become un-mortgageable. They have increased the value of the freehold retained by the developers or sold onwards to third parties, with a freehold purchase by the leaseholder in some cases unaffordable.
On 23 June and 15 September 2021 the CMA updated their investigation to confirm that developers have committed to amend granted leases to remove clauses causing ground rent to double every 10 or 15 years together with clauses converted to RPI-based rent increases and will no longer sell leases with such terms. The commitments also seek to deal with the situation where the freehold has been sold on to a third party.
This is for the benefit of leaseholders, whose ground rent will now remain at the amount payable when the leases were first granted and the ground rent shall not increase over time.
Future ground rents are being legislated against in the Leasehold Reform (Ground Rent) Bill which was published on 13th May 2021 on which we reported here.
If you would like further information or advice about ground rents and the reforms, please contact William Bethune.
High Court dismisses Caffe Nero landlord CVA challenge
The High Court this week rejected a challenge made under s.6 of the Insolvency Act 1986 to the company voluntary arrangement (CVA) proposed by the directors of Nero Holdings Limited (Caffe Nero) and approved on 30 November 2020.
The challenge was brought by one of Caffe Nero's landlords, who, under the terms of the CVA would be paid 30p/£ for rent arrears up to 30 November 2020.
Although the landlord voted in favour of the CVA, his position changed after a last minute offer was made by EG Group Limited to purchase the shares in Nero Group Limited. That offer included a proposal to clear all of Caffe Nero's rent arrears, subject to the CVA vote being delayed.
The offer was rejected and the CVA vote went ahead as planned. The landlord's challenge was therefore based on the decision making leading to that conclusion, which he said unfairly prejudiced him and/or was subject to some 'material irregularity'.
In response, Caffe Nero initially made an application to strike out the landlord's challenge and/or grant it summary judgment based on an argument that the challenge was being pursued for a 'collateral and illegitimate purpose' (it being common ground that the challenge was funded and encouraged by EG Group who wished to acquire the chain). The Court disagreed and, in July 2021, Caffe Nero's strike out application was rejected.
At the final hearing, the High Court ultimately rejected wholesale the landlord's challenge, finding that there had been no unfair prejudice and/or no material irregularity. In reaching this decision, the High Court indicated that Caffe Nero's nominees had "acted in good faith, in accordance with their professional duties and reached a perfectly reasonable decision that it was not in the best interests of the creditors to postpone the CVA Process…Balancing all the relevant factors and the risks involved, under considerable time pressure and without any clear route for postponing an electronic voting procedure, the conclusion that the nominees came to was well within the range of what a reasonable nominee could have come to in those circumstances".
This case underlines that nominees and directors must consider a wide range of factors in any decision making but a last minute offer will not automatically mean that a CVA vote must be delayed.
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Insights from across the firm