Lease frustration and COVID-19

Frustration of a contract occurs due to a supervening event meaning the contract is no longer capable of performance. If frustration is found to have occurred, the contract is automatically terminated.

The general test for frustration is as set out in Davis Contractors Ltd v Fareham UDC [1956] A.C. 696:

"frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract."

(Lord Radcliffe at paragraph 729). 

Commercial leases, like other commercial contracts, are capable of being frustrated. Could a tenant argue, therefore, that its lease has been frustrated as it is impossible to currently occupy premises due to the COVID-19 pandemic?  

It is worth starting by saying that there are no reported cases in England where a commercial lease has been found by the courts to have been frustrated. However, there are no English cases considering frustration by pandemic either. So how would a Court be likely to respond to such an argument?

Force majeure

Firstly, if there is any kind of force majeure clause in the lease then this is likely to affect any frustration argument. A tenant will not be able to argue that a supervening event which was contemplated directly or indirectly (e.g. by reference to acts of government) by the force majeure clause renders performance of the lease radically different from that contemplated when it was entered into.  

Force majeure clauses in leases are rare, but if there is one then it needs to be analysed to see if the risk of pandemic or the consequences of an event such as a pandemic have already been allocated between the parties. This would prevent a frustration argument, although the interpretation of such a clause in itself could very well lead to a dispute.

Impossibility 

Assuming there is no force majeure clause, has the mutually agreed purpose of the lease become impossible to perform or will a delay in performance render the lease radically different?  The terms of the lease, including the length, will be relevant here. 

Lease length

In National Carriers Ltd v Panalpina (Northern) Ltd [1981] A.C. 675, National Carriers Ltd ("NCL") granted Panalpina a 10 year lease of a warehouse which could only be accessed via a single road. The road was closed by the local authority for 20 months due to the dangerous condition of a neighbouring property. Panalpina was unable to access the property and failed to pay the rent. NCL bought action for unpaid rent. Panalpina argued the lease had been frustrated. The House of Lords held that the lease had not been frustrated as the interruption of 20 months in a 10 year term was not significant enough to destroy the contract. It held that although the doctrine of frustration could apply to leases, the circumstances in which it would apply would be rare. 

In Li Ching Wing v Xuan Yi Xiong [2004] 1 HKLRD 754 a tenant of a Hong Kong flat was forced to vacate their home for 10 days due to the SARS outbreak. The court held that the 2 year tenancy was not frustrated due to the brevity of the tenant's inability to occupy the premises.

In the case of Krell v Henry [1903] 2 K.B. 740, it was held that a 2 day licence to use a residential room which overlooked Pall Mall had been frustrated. In that case, the Court found that the licence had been granted for a very particular purpose; to watch the coronation procession of King Edward VII. This was the foundation of the contract and when the King fell ill and the procession was cancelled (an event which the Court held had not reasonably been in the contemplation of the parties at the date of the contract) this prevented performance of the contract, which was frustrated. 

Although the frustrated licence in Krell v Henry only permitted use of the premises in question for two days for a very particular purpose, there will be cases where short term lets have been made for a particular purpose where a tenant could draw parallels. For example, the let of a student room for a period of 12 months which is taken on the basis of physical tuition being given at a University. If the University will now be closed for a period until September (particularly if this is when the student let expires) then surely there must be an argument that it has been frustrated on the grounds that the mutually agreed purpose of the lease has become impossible to perform.  

Other lease terms

It is clear that cases will turn on their own particular facts, and in addition to lease length and whether the parties had a common purpose in entering into the contract (as in Krell v Henry), the alienation provisions in a lease will also be relevant. 

In Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), the EMA argued that after signing a 25 year lease for its EU headquarters in 2014, the UK's withdrawal from the European Union frustrated the common purpose of the lease. This argument failed. The Court found that, as will be the case in most commercial lease scenarios, the landlord and tenant had divergent purposes in entering into the lease. The landlord was looking to achieve a high rent and long-term cash flow, whilst the EMA was seeking a bespoke premises on a flexible term, paying a low rent. The fact that the lease expressly permitted the EMA to assign or sublet the property in part or whole showed that the lease contemplated the EMA may not remain there for the duration of the lease. 

In London and Northern Estates Company v. Schlesinger ([1916] 1 KB 20, the defendant, an Austrian national, took a lease of a residential flat in Westcliffe-on-Sea for a term of 3 years from March 1914. When war broke out in August 1914 the defendant became an alien enemy and by an Order in Council was prohibited from residing within certain specified areas, including Westcliffe-on-Sea. The defendant argued that the lease was frustrated as it was illegal for him to occupy the flat. The Court held that the defendant's personal residence in the flat was not the "foundation of the contract", as the coronation procession had been in Krell v Henry. The defendant had the right to assign or sub-let the flat to anyone to whom the lessors could not reasonably object, and it was not illegal for him to hold the lease, merely to occupy. 

Conclusions

Although it is unlikely that landlords and tenants will have expressly contemplated a pandemic such as this during lease negotiations, the general test for frustration sets a high bar that will be difficult to satisfy in a lease context. 

Even though performance of a lease may be temporarily prevented, it is unlikely to be prevented entirely save in the context of a short lease or a lease nearing its end. If the period during which a tenant is unable to occupy its premises due to the COVID-19 outbreak is likely to only be short in the context of the overall lease term, then based on the case law above it is unlikely that a tenant could successfully argue its lease has been frustrated. However, where a lease will expire imminently, and the tenant is unlikely to be in occupation again prior to expiry (or only for a very short period) we may begin to see arguments being put forward that the lease has been frustrated. 

It is also difficult to see how in most commercial lease contexts the parties would have a joint common purpose which has been frustrated by the COVID-19 outbreak, particularly where the tenant has the right to assign or sub-let. There may be limited scenarios where this could be argued e.g. in the example presented above of the frustration of a short-term student let if it can be argued that the common purpose of the lease was for the tenant to be able to attend physical tuition sessions.   

Despite the fact that the doctrine of frustration is likely to be of limited use to a commercial tenant, landlords are in some cases allowing lease concessions by negotiation and certain other government help is at hand for tenants to mitigate lease costs (for example a suspension of business rates for some tenants and government loan schemes).