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A recent High Court decision has important implications for commercial real estate owners considering taking enforcement action against defaulting tenants, particularly during unprecedented situations or in connection with newly enacted legislation.

The recent High Court decision in Leicester Square (2015) Ltd & Ors v Empire Cinema 2 Ltd [2024] EWHC 2294 has important implications for commercial real estate owners considering taking enforcement action against defaulting tenants, particularly during unprecedented situations or in connection with newly enacted legislation.

Case background

In this case, Empire Cinema 2 Limited (“Empire”) was the tenant of cinema premises in Leicester Square pursuant to a long lease with an expiry date in 2036.

As with other entertainment facilities, the cinema was closed for the period from 21 March 2020 to 18 July 2021 during the Covid-19 pandemic. Empire did not pay rent for that period and relied on a moratorium on enforcement procedures, as dictated by emergency legislation enacted in response to the global crisis.

Empire also claimed the benefit of a pandemic-specific statutory arbitration procedure and, via that process, sought to argue that it should pay just half the rent falling due during the closure period, with the balance being paid in instalments over a two-year period. This was not accepted by the arbitrator, which determined that the rent should be paid to the landlord in full.

On the basis of the arbitrator’s decision, and upon Empire failing to discharge the full rent arrears, the landlord, Leicester Square (2015) Ltd (“the Landlord”), forfeited the lease by effecting physical re-entry of the premises and proceeded to grant occupational interests, including two licences and a lease, to third party tenants immediately afterwards.

Crucially, the re-entry took place during the permitted appeal period in relation to the arbitration - being 28 days from the arbitrator’s decision - during which the moratorium was, arguably, still in place.

On this basis, Empire sought to challenge the forfeiture by seeking injunctive relief via the Courts.

Following a summary judgment application, the Judge at first instance held that the Landlord’s forfeiture of the Lease was unlawful on the basis that there was no entitlement to forfeit at the time of re-entry. The remedies open to Empire in these circumstances included an injunction allowing it to re-occupy the property, a claim for damages, a business disruption claim and a claim for legal costs.

In light of the consequences for the Landlord as a result of the County Court decision, including having to allow Empire back into occupation and paying damages for business disruption as well as legal costs, it sought to appeal the decision to the High Court asking it to consider, inter alia, the following key points:

1. Whether a moratorium was in fact in force at the date of the forfeiture based on the true construction of the relevant Covid legislation and associated Government guidance;
2. Whether the doctrine of illegality had any application to the facts of the case and notably whether Empire had acted illegally in connection with the arbitration by seeking to procure an arbitration award by fraud by misleading the arbitrator and Landlord;
3. Whether arguments of estoppel, waiver and abandonment accelerated the termination of the arbitration proceedings and therefore ended the moratorium prior to the forfeiture; and
4. Whether there was another compelling reason to proceed to full trial rather than allow summary judgment.

Decision

The High Court concluded that the appeal should be dismissed in all respects and only gave permission to the Landlord to further appeal in respect of the first ground. The Judge was satisfied that the moratorium was still in place at the time of forfeiture based on the relevant legislation and did not consider that Empire had flagrantly disregarded the Government’s guidance nor acted illegally in connection with the arbitration as averred by the Landlord.

The Judge could not find that Empire was prevented from arguing that the moratorium was still in force based on waiver or estoppel and observed that, even if there had been a valid waiver, this would simply bar any further appeal in the arbitration process and would not impact on the moratorium.

Finally, the Judge did not consider a decision by summary judgment to be inappropriate, commenting that this case did not, in actual fact, involve a “prolonged and serious argument” which would justify proceeding to full trial.

Implications

This decision demonstrates the importance for landlords to engage in strategic lease management in conjunction with their professional advisors and to keep well appraised of evolving legal interpretations and statutory amendments.

Well informed decisions regarding lease management, in particular those in relation to enforcement, will be crucial, particularly during unprecedented events such as a global pandemic.

Landlords must ensure their actions against tenants, particularly with regards to lease terminations and evictions, have solid legal grounding to avoid costly legal challenges and potential reputational damage and should always consult with their legal advisors if they are considering taking such action.

 

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