During COVID-19 crisis, many businesses do not have access to their premises. For some businesses, there is no access only during Alert Level 4, but for others, it could also be during other Alert Levels.

At present time, we get asked daily by the businesses who lease premises, if they must continue paying rent for the time when there is no access. COVID-19 crisis has significantly impacted many businesses’ solvency, and for some, the ability to avoid paying rent until they are able to start trading again is something that could save the business from shutting its doors permanently.

In our earlier article , we analysed how to temporarily stop/reduce payments of rent where the lease is on a standard deed of lease from the Auckland District Law Society. That deed of lease contains express provisions addressing emergencies and the treatment of rent during emergencies. We concluded that it is highly probable that COVID-19 crisis is ‘an emergency’ that the Auckland District Law Society deed of lease would cover.

In cases where a different lease agreement is used and that agreement does not contain similar emergency provisions, there could be a possibility to run an argument that the lease should be terminated as a result of the doctrine of frustration. The doctrine of frustration and its application to lease agreements during COVID-19 crisis is the topic of this article.

We note that both solutions analysed in our earlier and this articles, would be relevant where there is no collaboration between the tenant and the landlord. We highly recommend that the tenants and landlords work together during this period to ensure both parties come out commercially viable. This could be in a way of the landlord providing a temporary discount to rent payments. The reality for most landlords is that they are likely to experience difficulty in finding replacement tenants for some time.

Doctrine of frustration
The doctrine of frustration of contract allows parties to be relieved from their legal obligations where contracts have become impossible to perform. Frustration occurs where neither party has been the ‘defaulting party’ regarding their contractual obligations, but it has become incapable of performing the contract due to circumstances that are outside of the parties’ control.

In National Carriers Ltd v Panalpina (Northern) Ltd,[1] Lord Simon explained the doctrine in the following manner:

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 threshold to satisfy that the contract has been frustrated is high and the doctrine would not generally be applicable where the compliance with the contract is temporarily delayed, or the contract has become more expensive.

[1]     National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675.

In Planet Kids v Auckland Council,[2] the Supreme Court of New Zealand has confirmed that the doctrine of frustration could apply to leases.

Examples of frustrating events could include an unavailability of a thing (e.g. if the premises which were leased have been burnt), unavailability of a person (e.g. if the person who was supposed to provide services have become unwell or passed away), or supervening illegality (e.g. performing the contract have become illegal through legislation or Government’s intervention, either permanently or for a prolonged period).

Application to COVID-19 crisis
Whether the doctrine would be available to specific businesses during COVID-19 crisis will depend on various factors.

In Planet Kids v Auckland Council, relying on an earlier English authority, the New Zealand Supreme Court set out the following factors that would need to be considered in deciding whether a contract is frustrated:

  1. The terms of the contract;
  2. Its matrix or context;
  3. The parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at least to the extent that these can be ascribed mutually and objectively;
  4. The nature of the supervening event; and
  5. The parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.

In the context of COVID-19, the relevant factors to consider are the length of the lease (e.g. a 10 years lease or a 6 months lease), the stage of the lease at the time of COVID-19 (e.g. initial or final stages), the nature of the business and its ability to operate from the premises during various Alert Levels, and any express indications within the lease agreement as to the availability of frustration.

For instance, if the lease is of a short term, and the business is not able to operate during some or all Alert Levels, there is a higher chance that the doctrine of frustration would apply. However, if the lease is for a period of 10 years and/or it was agreed within the lease agreement that no event could render the lease frustrated, it is very unlikely that the doctrine would be applicable.

Unlike the provisions of the Auckland District Law Society deed of lease, which might allow reduction to/stopping payments of rent on a temporary basis, in the event of a frustrated lease, the remedy is the termination of the lease. For this reason, before raising the doctrine of frustration, the tenants should carefully consider how losing the lease would impact their business after they are able to start operating their business again. The tenants would need to balance the long-term implications of the lost lease, against the immediate liquidity issues.

Conclusion
The doctrine of frustration is a complex principle that should be relied upon carefully. If the tenant incorrectly relies on the doctrine, the tenant might be repudiating the lease and could become liable for the landlord’s losses.

[2]     Planet Kids v Auckland Council [2013] NZSC 147.

If you need help with assessing whether your lease is suitable for termination in light of COVID-19 crisis, or if you need assistance to carry negotiations with the landlord, feel free to contact one of our experts at Norling Law for a free 30-minute no-obligation consultation which can be booked here.