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• Author: Ranjeet Johal

COVID 19: REVISTING FRUSTRATION IN THE CONTEXT OF LEASES

Co-Authored by Ranjeet Johal of Mills Chody LLP, Jeff Hardman and James Saunders of New Square Chambers

How did we get here?

Sweeping and unprecedented rules, previously unimaginable, have been enacted by the Government to delay the spread of the 2020 COVID-19 pandemic. Taken together, these changes constitute the most restrictive and draconian laws imposed in England since the Second World War. In particular, The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (‘the Regulations’) were enacted on 26 March 2020 by the Secretary of State for Health and Social Care, Matt Hancock. These Regulations impose severe restrictions mandating the closure of certain types of businesses alongside prohibitions on freedom of assembly and freedom of worship.

The Regulations replace The Health Protection (Coronavirus, Business Closure) (England) Regulations 2020, which supplemented the new Coronavirus Act 2020 and have been made pursuant to s.45C of the Public Health (Control of Disease) Act 1984 rather than the Coronavirus Act 2020. As the explanatory memorandum to the Regulations makes clear, the Regulations were made under the emergency procedure without the need for Parliamentary approval. The additional powers granted by the Regulations must be reviewed every 21 days, with the first review being due on 15 April 2020.

It is evident that the pandemic has the potential to touch every corner of the landlord & tenant ecosystem, from the budding entrepreneur fighting to salvage her pop-up restaurant on Brick Lane, to the embattled retail landlord Intu, struggling to contend with tenants refusing to pay. Even before COVID-19 struck, many tenants were suffering due to the combined effects of Brexit uncertainty and adverse structural shifts in the UK retail sector following the rise of ecommerce.

For those tenants resisting demands for payment, Practice Direction 51Z of the Civil Procedure Rules provides a temporary life raft. The Practice Direction came into force on 27 March 2020, imposes a 90 day stay of proceedings and applies to all Part 55 possession proceedings (residential or commercial). However, crucially, the effect of the new Practice Direction is merely suspensory; the obligation to pay rent has not been extinguished. In practice, landlords are simply issuing now (and seeking an immediate stay) or inviting the court to adjourn on-going claims and ask that they be re-listed on the first open date after 25 June 2020.

However, where does this leave those businesses forced to close by government intervention following the expiry of Practice Direction 51Z on 25 June 2020? To what extent does the common law doctrine of frustration provide any assistance to tenants seeking to avoid their obligations under a lease where performance has been rendered ‘impossible’?

Where to start?

Prior to the Regulations giving legal force to the social distancing rules announced by Boris Johnson during his televised address to the nation on 23 March 2020, there was some speculation that the Government was reluctant to mandate social distancing to avoid a deluge of claims by tenants under the terms of their insurance policies. However, with the notable exception of the All England Lawn Tennis & Croquet Club,[1] most insurance policies held by tenants are unlikely to cover the global pandemic despite the Government’s declaration of COVID-19 as a ‘notifiable disease’.

[1] https://www.insurancebusinessmag.com/uk/news/breaking-news/coronavirus-wimbledon-insured-against-global-pandemic–reports-218431.aspx

Usually, the starting point for any tenant will always been the terms of the lease, which may contain a ‘rent suspension clause.’ However, such a clause is usually only engaged where there has been some physical destruction of the building rendering the premises unfit for occupation by an insured risk. To that extent, the forced closure of a business due to government intervention to halt a global pandemic is unlikely to trigger a suspension of rent payment. Moreover, express covenants allowing the parties to end the agreement due to an unexpected external event (i.e. a force majeure clause) are infrequently incorporated into a lease.

Whether a lease has been frustrated?

Like promissory estoppel, frustration is a doctrine too often invoked by a party to a contract who finds performance difficult or unprofitable; it is very rarely relied on with success and has been described as “a kind of last ditch”.[2] 

[2] Tsakiroglou & Co Ltd v Noblee Thorl GmbH [1960] 2 QB 318 at [370] (Harman LJ).

Briefly stated, a contract may be frustrated where, after the contract has been entered into, without default of either party, the contract has become impossible of legal performance, or incapable of being performed because the circumstances in which performance is called for render it a thing radically different from that which was undertaken by the contract. Though the statement of a clear test is difficult, the watchword of frustration is one of “radically different” performance doctrine.[3]

[3] For a recent statement of the applicable principles see Mr Justice Marcus Smith’s judgment in Canary Wharf (BP4) T1 Ltd & Ors v European Medicines Agency [2019] EWHC 335 (Ch).

In the past, English law had difficulties applying frustration to contracts relating to land, with opinion previously conflicted on the matter (see Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd[4]).[5]

[4]  [1945] AC 221

[5] Albeit it has long been established that the doctrine of frustration applies to licences to occupy land. See Krell v Henry [1903] 2 K.B. 740.

However, it is now settled that in principle frustration can apply to a lease. Dicta falling from the House of Lords in National Carriers Limited v Panalpina (Northern) Ltd[6] held that the doctrine of frustration could apply to leases, although the occasions on which it may be applied were considered to be rare. In that instance, a warehouse had been demised to the defendants for a 10-year period. The only access to the warehouse was by a street which the local authority closed for a 20-month period. In an action for unpaid rent, the defendants claimed that the lease had been frustrated. The court considered that the fact that a demised warehouse had been unusable due to the closure of a street did not warrant a finding that the lease had been frustrated.

[6] [1981] AC 675

For tenants looking for guidance on the application of frustration in the context of leases, there are some reported decisions containing opinions on the types of situations in which the courts might so hold a lease to be frustrated. In the Cricklewood Property case[7], the House of Lords could foresee such a situation arising “if, for example, some vast convulsion of nature swallowed up the property altogether, or buried it in the depths of the sea”[8]. Moreover, the example of a lease providing for the use of a property to sell alcohol, which was subsequently banned, was given in the National Carriers Limited case[9](above). In the Scottish case of Tay Salmon Fisheries v Speedie[10], a salmon fishery became unusable due to the construction of a nearby bombing range.

[7] Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221

[8] ibid at [229]

[39 [1981] AC 675

[10] 1929 SC 593

In London and Northern Estates Company v Schlesinger[11], a property had been let out to an Austrian National. The lease included an alienation provision, which allowed the tenant to assign or sublet the property with the landlord’s consent, such consent not to be unreasonably withheld. When the First World War broke out, the tenant was prohibited from living in the area. In defending an action for unpaid rent, the tenant argued that the lease was frustrated. The court held that although the tenant could not personally occupy the property, he was able to sublet it and therefore there was no frustration.

[11] [1916] 1 KB 20

More recently, the European Medicines Agency (‘the EMA’), which had its headquarters in Canary Wharf, sought to argue that Brexit was a frustrating event and that its 25 year lease, which had commenced in October 2014, ought to be discharged. Although Brexit itself was a seismic event, Marcus Smith J held in that it would not frustrate the lease as the EMA retained the capacity and ability to continue to perform the covenants incorporated within the lease,[12] albeit he accepted, inter alia, that the frustration of a lease could occur by way of a supervening illegality.

[12] Canary Wharf (BP4) T1 Limited v European Medicines Agency [2019] EWHC 335 (Ch)

Thoughts

For the here and now, it is suspected that frustration will only be available to tenants with shorter terms given that the longer the lease, the more difficult it would be to establish frustration of the relationship: “long term speculations and investments are in general less easily frustrated than short term adventures”.[13] The question is likely to be treated by the courts as one of degree, so that a longer interruption might produce frustration provided that the supervening event strikes at the very root of the contract i.e. perhaps the forced closure of a short term pop-up restaurant?

[13] National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at [691]  (Lord Hailsham of St Marylebone)

For longer leases, andparticularly where the circumstances fall short of those sufficient to frustrate a lease, the current lockdown constitutes a supervening event which may nevertheless provide the tenant with a lawful excuse for non-performance of a covenant; this may be a good defence to an action for forfeiture. In John Lewis Properties Plc v Viscount Chelsea[14], it was held by Mummery J. that although the lessee was in breach of covenant in failing to demolish and rebuild, there was no prospect of obtaining planning permission for the listed building. This provided the tenant with a lawful excuse for non-performance of the covenant. Mummery J. relied on dicta of Lord Russell in the Cricklewood Property case[15](above):

[14] [1993] 34 EG 116 (ChD)

[15] Cricklewood Property and Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] AC 221

“It may well be that circumstances may arise during the currency of the term which render it difficult, or even impossible, for one party or the other to carry out some of its obligations as landlord and tenant, circumstances which might afford a defence to a claim of damages for their breach, but the lease would remain.”[16]

[16] ibid at [234]

However, any lawful excuse, if made out, will only be temporary. It will not discharge a tenant from its obligations under the covenant. If circumstances change removing the excuse, the obligation under the covenant would revive.

One should note that that section 138 of the County Court Act 1984 provides three different forms of relief from forfeiture in cases of non-payment of rent. Pursuant to sub-section 3, the court has wide discretion to extend the period for possession. Any such extension will provide the tenant with additional time to pay off the arrears. It should be noted that in exceptional circumstances, the period has been extended from 4 weeks to 18 months – see Varndean Estates v Buckland.[17]

[17] [1967] 111 Sol Jo 684

Conclusion

As set out above, the starting point for a tenant should be to check whether the lease contains a rent suspension clause. A tenant would also do well to check whether any insurance policy they have covers their situation. Whilst a tenant may be forgiven for not wishing to pursue a defence to possession proceedings based upon the bold submission that the lease has been frustrated by a supervening illegality, there may nonetheless be some mileage in circumstances where the lease term is relatively short and the purpose of the grant has been defeated by the forced closure.

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