Frustration
New York Mellon v Cine UK (High Court) [2021]
This is another in the line of cases which have been created by the pandemic under which a party sought to claim that the pandemic had ‘frustrated’ a contract. What was quite unique in this case was the argument that contracts could be temporarily frustrated (similar to a suspension), following which they could come back to life.
Facts:
Various tenants had been unable to trade, to varying degrees, during the lockdown periods ordered by the UK Government. All of the premises in question were required to close to the public for significant periods. For some periods it was theoretically possible to open, but it was nevertheless commercially unfeasible to do so in light of the restrictions. The tenants failed to pay instalments of their rent and proceedings were issued by their landlords for payment. They sought summary judgement.
The tenants argued that clauses in the leases should be construed to provide that the rents ceased to be payable, at least whilst the premises were or had to be closed due to the restrictions, or alternatively that terms should be implied to that effect.
The tenants claimed that they were relieved from their obligations to pay the rents due to a suspensory frustration, i.e. a short-term frustration following which the leases would continue as before.
The tenants claimed that account should be taken of UK government published guidance which encouraged landlords and tenants to consult and negotiate with regard to possible suspension of rent payment obligations.
Decision:
The High Court rejected all of the tenants’ arguments and granted summary judgment in favour of the landlords.
The judge referred to the case of National Carriers v Panalpina dating from 1981 in which the House of Lords held that a 15 year lease of commercial premises had not been frustrated where, 10 years into the lease, a road closure prevented the premises being used for some 18-20 months.
In principle, the doctrine of frustration applies to commercial leases, and an enforced closure of the premises arising from matters outside the control of the parties could qualify as a supervening event that gives rise to frustration especially where, as here, the user clauses only permit what have become impossible uses.
However, only in a rare case will a supervening event have such a consequence. The question is whether the situation has become so “radically different” that it is so outside the reasonable contemplation of the parties as to render it “unjust” for the contract to continue. Relevant to this question are: the original term of each lease, the likely period of the disruption and the likely remaining term of the lease once the disruption has ended. This should be considered both quantitatively and qualitatively in deciding whether there is a “radical difference”, and whether the new situation justifies a departure from the agreed allocation of risk (which, in the context of these leases, was that the tenant had agreed to pay the rent except in certain very defined circumstances).
The judge accepted that the Covid Regulations would, or at least could, qualify as a supervening event. Although they could have been foreseen, they were, in modern times at least, “unprecedented”.
However, the reasonably expected period of the closures, (never greater than 18 months), had to be seen against the overall duration of the leases (of between 15 and 25 years) and the periods of time remaining under the leases (followed by potential guaranteed renewals under applicable statutes). Significant periods of time would therefore remain in relation to each lease after what will have been only a limited period of enforced closure.
Overall, the judge did not see this case as being sufficiently different from Panalpina where the matter was decided against the tenant. He did not see any real prospect of performance of the bargain being so “radically different” from that originally envisaged such as to make it “unjust” for any of the leases to continue. In this respect it is worth bearing in mind that in this case the various tenants had specifically accepted the risk / obligation of being obliged to continue paying rent except in certain very specific cases. This may not be the case in many commercial contracts.
The judge noted that a situation where the lease term ended during a period of lock-down could possibly be argued to be a different situation (presumably with a possibly different conclusion).
The argument that there had been a “temporary frustration” was rejected because there is no such thing as a “temporary frustration” in law. Frustration has the effect of discharging the contract and ending it once and for all. Frustration does not suspend a contract, it terminates it and it is not possible for it to be subsequently revived.
The Government’s ‘guidance’ to landlords and tenants was not found to have altered the position as it was essentially non-binding and simply encouraged negotiation between the parties rather than mandating any specific outcome.
Points to Note:
- Although related specifically to property leases, the principles underlying this decision would apply equally to other commercial contracts.
- The bar for a contract to be frustrated is a high one and only in very rare cases will supervening events satisfy the ‘radical difference’ test.