Court upholds judgement for payment of commercial rent

A technical article from Herbert Smith Freehills comments on a recent court case where a landlord was awarded judgement for outstanding rent.

The original can be seen here, and says:-

A High Court Master has granted summary judgments to the landlords of commercial premises in their claims for payment of rent due since the outbreak of the Covid-19 pandemic and imposition of consequent restrictions in March 2020: Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2021] EWHC 1013 (QB).

Among other arguments raised by the tenants, the Master rejected their contention that the leases had been “temporarily frustrated” during the periods in which the premises were forced to close, finding that there is no such thing as temporary frustration as a matter of law. Frustration occurs where performance of a contract has become so “radically different” to what was contemplated at the time of contracting that it would be unjust for the contract to continue. The effect of frustration is to bring the contract to an end, so that it cannot then be revived.

This conclusion is not surprising, but the decision is also of interest for the Master’s comments as to why it was clear that the leases had not been frustrated altogether, particularly as this is one of the few cases to date in which the courts have considered arguments of frustration in the context of the Covid-19 pandemic. The Master accepted that an enforced closure due to the pandemic and related restrictions could result in the frustration of a commercial lease, particularly where the only permitted use of the premises had become impossible. However, an anticipated closure of around 18 months would not be sufficient to result in frustration in the context of leases of 15 years or more, where the leases would still have more than a year to run after the disruption had ceased.

The decision demonstrates that, particularly in the context of commercial leases, the limits of frustration are narrow and the courts are consistent in their message that, while a lease can be frustrated, the bar has been set very high to establish frustration.

Of course, where parties wish to avoid the strictures of the doctrine of frustration, they can include a force majeure clause in their contract setting out what is to happen if unexpected events intervene – providing, for example, for obligations to be temporarily suspended if performance is prevented by specified types of occurrence.

For more information on these issues, see our guide When events intervene: Force majeure, frustration and material adverse change (issue 7 of our series of contract disputes practical guides).

 

Background

The claimant landlords sought summary judgment in their claims against the defendant tenants for rents which had (in principle) fallen due under three leases of commercial premises:

  1. Cine-UK (in Bristol): a lease for 35 years from 1 May 1999, with a break clause enabling determination after 25 years.
  2. Mecca Bingo (in Dagenham): a lease for 15 years from 18 September 2017.
  3. SportsDirect (in Blackpool): a lease for 15 years from 5 October 2007.

They were all protected leases under Part II of the Landlord and Tenant Act 1954, which meant there was a right to continued renewals (at then market rents) with statutory compensation if a renewal did not take place in certain circumstances.

Each lease also contained provisions defining the prescribed use of the premises, as a multiplex cinema, bingo hall and sport and leisure goods retailer, respectively. Each contained a qualified covenant against assignment or underletting.

The rents in question covered periods from 25 March 2020 onwards, during which the Covid-19 pandemic and consequent statutory regulations (the “Covid Regulations”) meant that all of the premises were required to close to the public for significant periods. It was for some periods theoretically possible to open the premises, but it was nevertheless commercially unfeasible to do so in light of the restrictions, save that the Blackpool SportsDirect shop was opened for limited periods.

The tenants argued that they had a real prospect of defending the claims for payment of rent, and/or there was a compelling reason why the claims should be disposed of at a trial, for a number of reasons:

  • Rent cesser 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 there should be terms implied to that effect.
  • The landlords were unable to sue the tenants for (or had to give credit for) all sums recoverable from insurance the landlords had taken out against the event of pandemic and which covered the rents, or any such sums which were not recoverable due to the landlords’ failure to insure against the rents in the relevant circumstances.
  • The tenants were relieved from their obligations to pay the rents due to a suspensory frustration, ie a short-term frustration following which the leases would continue as before, or alternatively due to supervening illegality and/or temporary failure of consideration.
  • An application of relevant UK government guidance requiring landlords and tenants to consult as to rent suspension and similar measures, and the need for a full consideration of all the issues in the light of the (allegedly) unprecedented circumstances of the pandemic and of the Covid-19 Regulations.

Decision

The High Court (Master Dagnall) rejected all of the tenants’ arguments and granted summary judgment in favour of the landlords. This post addresses only the aspect of the decision which considers the issue of frustration.

The Master noted that, in a similar claim relating to a further lease which was initially listed with the present claims but which had since settled, the tenant had raised an argument that the lease had been frustrated altogether due to Covid and the Covid Regulations. None of the remaining defendants had sought to advance that argument, instead arguing that there had been a “temporary frustration” resulting in rent not being payable for particular periods. The landlords contended, in response, that: (a) there had been no frustration at all; and (b) there is no such thing as a “temporary frustration” in law.

The Master referred to National Carriers v Panalpina [1981] AC 675, 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 being used for some 18-20 months. In that case Lord Simon described the doctrine and the effect of frustration as follows:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

The Master also referred to Canary Wharf v European Medicines Agency [2019] L&TR 14 (considered here) where the High Court found that a lease of Canary Wharf premises by the European Medicines Agency had not been frustrated by Brexit. In that case, Marcus Smith J noted that only if the supervening event renders the performance of the contract “radically different” from that contemplated at the time of the contract will the contract be frustrated.

This followed the approach in The Sea Angel [2007] EWCA Civ 547, in which the Court of Appeal held that what was required was a multi-factorial approach, with the factors to be considered including the terms of the contract, its context, the parties’ knowledge and expectations at the time of contract, the nature of the supervening event, and “the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances”. Ultimately, the Master noted, the doctrine is one of justice, and the consequences of the court’s decision must be measured against the demands of justice.

Although it was no longer a live issue in the case, the Master said he thought it would be useful to state shortly his reasons as to why it was clear that none of the leases had been frustrated altogether. The key points were as follows:

  • 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 is a supervening event that could give rise to frustration especially where, as here, the user clauses only permit what have become impossible uses.
  • However, it is only in a rare case that a supervening event will have such a consequence. The question is whether the situation has become so “radically different” that it is so outside what was the reasonable contemplation of the parties as to render it “unjust” for the contract to continue.
  • Relevant to this 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 as to whether there is such a “radical difference”, and whether the new situation justifies a departure from the agreed allocations of risk (which, in the context of a lease, is that the tenant has agreed to pay the rent except in defined circumstances).
  • The Master accepted that Covid and the Covid Regulations would, or at least could, qualify as a supervening event. Although they could have been foreseen they were, in modern terms at least, properly termed “unprecedented”.
  • However, the reasonably expected period of closures were never greater than 18 months, seen against the overall durations of the leases (as referred to above) and the potential renewals under the 1954 Act. Significant periods of time would remain in relation to each lease after what will have been only a limited period of enforced closure.
  • Overall, the Master did not see this case as being sufficiently different from Panalpina where the matter was determined summarily against the tenant. He did not see any real prospects of there being a “radical difference” such as to make it “unjust” for any of the leases to continue bearing in mind their terms and their allocations of risk.
  • The Master noted that he was not considering a case where the contractual lease term ended during lock-down. That could be argued to be a different situation, but was not before him.

As for the argument that there had been a “temporary frustration”, the Master held that this also had no real prospect of success for two combined reasons:

  1. There is no such thing as a “temporary frustration” in law. Frustration has the effect of discharging the contract and ending it. That is one reason why such a “radical difference” has to exist. Frustration does not suspend the contract, rather it terminates it and so that it does not subsequently revive.
  2. The doctrine of frustration is dependent on a “radical difference” having occurred which renders it unjust for the contract to continue. It is difficult to see how, where such a sufficient “radical difference” does not exist, there can be any frustration at all. If there could be such a temporary frustration then Panalpina would have been a classic case of it and would have been decided differently.
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