Are you Landlords feeling Covid- 19 frustrated? Should you relax the terms of the Lease?

A contract is a legally binding agreement. The law takes a dim view of parties who break their promises. In the current Coronacrisis, Can a commercial tenant be excused from paying rent? Should a Landlord negotiate and relax terms. Lessons from the past are here.

FRUSTRATION is an English contract law doctrine, per Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council [1956] AC 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. … It was not this that I promised to do”
It means that there must be a break in the circumstances when the contract was agreed, and its performance in the new circumstances. But not it seems an easy task in the case of a lease.

Li Ching Wing v Xuan Yi Xiong [2003] HKDC 54
Facts: In 2002 L let his flat in Kowloon to X for 2 years. During the SARS outbreak, some residents in the block contracted SARS. X vacated to stay with his family on 29 March 2003. On 31 March, the Hong Kong Government issued a 10-day isolation Order for the block. On 1 April, the remaining residents of the block were evacuated. On expiry of the Order, X and other residents moved back in.
On 24 April 2003, X wrote to L to terminate his tenancy. L said this was a wrongful repudiation of the tenancy and sued for rent for the balance of the term and damages. X’s primary defence was that the isolation Order frustrated the tenancy agreement
Held: Relying on National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, frustration of a lease cannot occur unless outstanding performance of the contract in accordance with its terms differs significantly from what the parties reasonably contemplated. What is required is a comparison of the likely period of interruption with the outstanding period of performance.
In National Carriers, the lease was not frustrated, even though the street which gave the only access to the block/flat was closed for over a year.
In Wing, as the isolation order only prevented access to the premises for a period of 10 days, this was relatively insignificant in comparison to the two-year term, and therefore the court found that the tenancy had not been frustrated. As the judge said: “fear alone did not provide the tenants with a legal justification to terminate their tenancy agreements”.

Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch);
Facts: EMA, an agency of the EU, held a lease granted in 2014 of part of premises in London, for a term of 25 years. When the UK served the Art 50 notice of intention to leave the EU, EMA said that the UK’s withdrawal would frustrate its lease because it would no longer be able lawfully to exercise the rights conferred on it by the lease, including the rights to occupy the premises or to assign.
Held: The changes brought about by Brexit did not render the tenant’s occupation of the premises impossible and did not render the tenant’s performance under the lease something “radically different”.

Comment: Given the foregoing it seems that a court will not be willing to find that a lease has been frustrated, even if premises are temporarily closed as a consequence of a Covid-19 outbreak. Yet a tenant with a short-term tenancy (e.g., a pop-up kiosk) might successfully argue frustration of the tenancy if as a result of a future closure he could not access the premises for a substantial part of the term of its tenancy. In cases involving longer terms, a tenant is unlikely to succeed – unless the period of enforced closure is very long.

ALTERNATIVES?
Implied Condition e.g. Fitness for habitation? This is unlikely to excuse commercial tenants. Landlords of residential property may wish to consider their obligations under the Homes (Fitness for Human Habitation) Act 2018. Landlords could be liable under the 2018 Act if the premises are not fit for habitation due to a “prescribed hazard” which includes personal hygiene, sanitation and drainage. In Wing, the spread of SARS in the block was caused by the U-traps in the sewage systems in many of the flats being left dry, so the virus could pass from the building sewage system back to the apartments. The court did not rule on the point, but it was considered that it was possible that during the isolation Order the premises were not fit for human habitation.
Act of God? Force Majeure? Provisions for such events do not usually form part of a lease. These terms would not be automatically or wilfully implied by the Court. These situations may in certain circumstances be events leading up to frustration of a contract but as above, this is not easy.

HELP!! THE CORONAVIRUS ACT 2020
This Act suspends a landlord’s ability to take forfeiture action for business tenancies (as defined by the Landlord and Tenant Act 1954. From 26th March 2020, a landlord cannot lawfully evict a business tenant if the tenant defaults on rent due in the next three months i.e., ending 30th June 2020. At the same time, during this period, no Landlord will be regarded as waiving his right of re-entry/forfeiture for non-payment of rent. The tenant is given a breathing space but the rent for the period will still have to be met.
The courts will not re-write a lease so the parties must try to negotiate a solution. Much will depend on their respective bargaining power. Now who remembers the High Trees Case?

Central London Property Trust v High Trees House [1947] KB 130:
Facts: In 1937 CLP granted a lease of a block of flats to High Trees at a ground rent of £2,500. High Trees had difficulty in getting tenants for all the flats and with the onset of WWII by 1940 many of the flats were still vacant. It did not look as if there was to be any change to this situation in the near future. CLP agreed to reduce the rent to £1,250 during the war years. The agreement was put in writing and High Trees paid the reduced rent from 1941 but was silent as to arrears. When the war was over the flats became fully occupied and the CLP sought to return to the originally agreed rent – and sue for arrears.

Held: The rent would be returned to the original rate for the future only. CLP could not claim back the arrears accrued during the war years. Lord Denning established the doctrine of promissory estoppel. Promissory estoppel prevented CLP going back on their promise to accept a lower rent despite the fact that High Trees gave nothing in return: “In my opinion, the time has now come for the validity of such a promise to be recognised. The logical consequence, no doubt is that a promise to accept a smaller sum in discharge of a larger sum, if acted upon, is binding notwithstanding the absence of consideration”

So Landlords are free to negotiate but must, as always, take legal advice and ensure that any agreement is clearly set out in writing

STAY SAFE!

This Update is not a definitive analysis – take legal advice before pursuing any course of action.