Can a lease be frustrated at law, ending the parties' legal obligations?

The NSW Court of Appeal was recently called upon to deal with further fallout from the Covid-19 pandemic in Cao v ISPT Pty Ltd [2024] NSWCA 188. I am currently testing an AI platform. Here is an AI generated summary of the case (which took a few seconds): Background The appellants, Howard Cao and Yuan Zhao, were guarantors of a three-year commercial lease agreement (the Lease) for restaurant premises in the World Square Shopping Centre in Sydney. The tenant, Beijing Roast Duck Sydney Pty Ltd (the Tenant), operated the "Quanjude" restaurant at the premises. The Lease commenced on 1 October 2019, with an option to renew for another three years. The respondents, ISPT Pty Ltd and AWPF Management Pty Ltd, were the landlords and owners of the shopping centre. The Public Health Orders In response to the COVID-19 pandemic, the New South Wales government issued a series of public health orders under the Public Health Act 2010 (NSW), commencing on 23 March 2020. These orders imposed various restrictions on the operations of hospitality venues, including restaurants. The key phases were: a period when only takeaway service was permitted; a subsequent phase allowing limited dine-in capacity based on a 4 square metre rule per customer; and later, an increased capacity based on a 2 square metre rule. Principles of Frustration The doctrine of frustration applies when an unforeseen event renders the performance of a contract radically different from what was contemplated by the parties. However, it does not apply if the supervening event was a risk allocated to one party under the contract. Determining frustration involves evaluating the degree of impact on contractual performance, the length of disruption, and whether the parties still hold valuable rights under the contract. Frustration is not readily established, and the effects on a party's business, while relevant, are not determinative. Special Condition 4 The appellants argued that Special Condition 4 of the Lease, which required the Tenant to open the premises during specified trading hours, was rendered incapable of performance by the public health orders, leading to frustration. The Court rejected this argument, finding that the public health orders did not prevent takeaway operations, and that Special Condition 4 could not reasonably be construed as requiring illegal activity. Effect on the Tenant's Business The appellants contended that the public health orders transformed the Tenant's restaurant business into a radically different business, rendering it unviable for the remainder of the Lease term. However, the Court held that the risk of business interruption due to government action was allocated to the Tenant under the Lease. Additionally, the public health orders did not create a fundamental change in what was contracted for, as the restaurant could still operate, albeit with reduced capacity for a significant portion of the remaining term. The summary provided above appears accurate, although it does not provide any great detail about the doctrine of frustration and the legal principles that were considered by the NSW Court of Appeal. A further query posed to the AI platform generated the following response (again in seconds): The key legal principles discussed in the case, particularly regarding the doctrine of frustration of a contract, are summarised as follows: - Doctrine of Frustration: The doctrine applies if a supervening circumstance renders the context of performance of a contract so different from what the parties had assumed, making the contract fundamentally or radically different from what was contracted for. It does not apply if the supervening event is a risk for which one party had assumed responsibility under the contract. Frustration involves issues of degree and is not lightly made. The test looks at the effect of the supervening event on the performance of contractual obligations and the enjoyment of contractual rights. Frustration can arise even where contractual obligations could still largely be performed and may occur as a result of creeping or gradual change. - Allocation of Risk: In this case, the risk of disruption to the Tenant’s business by external events, including governmental action, was allocated to the Tenant under the Lease. Various provisions in the Lease contemplated the possibility of the business being interrupted or affected by external events. - Assessment of Frustration: Assessing frustration is a practical matter and should not be approached in a one-sided fashion. It requires considering both restrictive measures enacted in response to the pandemic and governmental measures introduced to aid businesses through the crisis. The appellants did not establish that the public health orders rendered the Tenant’s business unviable for the remainder of the Lease term or any significant part of it. Implications for Future Litigation: - Future litigation arising from the COVID-19 pandemic and state government responses will need to consider carefully the allocation of risk in contracts and whether the supervening events were risks assumed by one of the parties. - Courts will assess the practical impact of supervening events on the performance of contractual obligations and the enjoyment of contractual rights, taking into account both restrictive measures and governmental aid measures. - The high threshold for establishing frustration means that mere disruption or increased difficulty in performing contractual obligations may not be sufficient to claim frustration. These very brief summaries confirm that there is a very high bar to establishing that a contract (in this case a commercial restaurant lease) has been frustrated by either the Covid-19 pandemic itself or the various state government responses to the pandemic in imposing various restrictions on the population at large, and restricting the numbers of people who could attend restaurants to dine out at various times as the pandemic raged. WG Stark

Are there any cases about the Victorian retail tenancies moratorium due to the Covid-19 pandemic?

In C B Buffet (Burwood) Pty Ltd v Delloyd Pty Ltd [2020] VCAT 1234 VCAT member Kincaid heard an application for an injunction to restrain a landlord from taking possession of retail premises. 

The case is of interest as it considered the application of the moratorium on rent in retail leases introduced by the Victorian government for the Covid-19 pandemic. 

As readers will know, in order to establish an entitlement to interlocutory injunctive relief an applicant must first demonstrate that there is a serious question to be tried as to its entitlement to relief. In respect of this question, the applicant must make out a prima facie case in the sense of demonstrating that, in the circumstances, there is a sufficient likelihood of success at trial, in respect of the question, to justify the preservation of the status quo pending the determination of the parties’ rights at trial. This does not mean that the applicant has to establish that it is more likely than not that it will succeed at trial. How strong the probability needs to be depends upon the nature of the rights asserted, and the practical consequences likely to flow from the relief sought.

An applicant must also establish that the balance of convenience favours the granting of an injunction. The Tribunal should take whichever course appears to carry the lowest risk of injustice should it turn out to have been wrong, in the sense of granting an injunction to a party who fails to establish its right at trial or failing to grant an injunction to a party who succeeds at trial.

Background

The tenant alleged that it operated a Chinese buffet style restaurant, and that it suffered a decline in business “from around January 2020” due to the Covid-19 pandemic.

The member stated that it was noteworthy that in late January 2020 the first Australian cases of Covid-19 were reported, mainly incoming travellers from China. The first Australian death from Covid-19 was reported on 1 March 2020, and the WHO declared the pandemic on 11 March 2020. News reports at the time indicated, however, that by early February 2020 Chinese restaurant businesses in Melbourne had substantially lost their customer base, and by mid-February 2020 many well-known Chinese restaurants in Melbourne had been forced to close.

The tenant gave evidence that in “early February 2020” its business was closed.

On 13 March 2020 the tenant received from the landlord a notice of default, which required the tenant to remedy certain defaults within 14 days. 

On 27 March 2020 the landlord took possession of the premises due to the non-payment of rent and other outgoings claimed in the notice of default.

On 29 March 2020 the National Cabinet announced a set of principles by which there should be a moratorium on evictions of commercial and residential tenants over the next six months for tenants who were unable to meet their commitments due to the impact of the Covid-19 pandemic. The principles were formalised on 3 April 2020, and were subsequently contained in what was called the National Cabinet Mandatory Code of Conduct-SME Commercial Leasing Principles During Covid-19 (the “Code of Conduct”).

These principles subsequently became the subject of legislation in Victoria (the “Covid-19 legislation”), comprising:

(a) COVID-19 Omnibus (Emergency Measures) Act 2020 (the “Act”), which came into operation on 25 April 2020;

(b) COVID-19 Omnibus (Emergency Measures)(Commercial Leases and Licences) Regulations 2020 (the “Regulations”), made 1 May 2020 under section 15 of the Act, but taken to have come into operation on 29 March 2020; and

(c) Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (the “Rules”), which came into effect on 9 April 2020.

In summary, the Regulations provide that where a tenant has an “eligible lease” as defined in section 13 of the Act, it is entitled to avail itself of a rent relief regime as described in the Regulations. When promulgated, the Regulations were to expire on 29 September 2020, but they have since been extended.

One of the requirements for qualification as an “eligible lease” was that the lease was in effect on the day the first regulations made under section 15 of the Act came into operation. That date was 29 March 2020. The landlord submitted that the lease, having been brought to an end on 27 March 2020, did therefore not qualify as an eligible lease. 

The landlord also submitted that this was relevant when considering the tenant’s alternative claim for relief against forfeiture, and the liabilities the tenant would have to meet as the usual condition of granting relief.

Interestingly for our purposes, the tenant alleged that the landlord was not entitled to re-enter the retail premises other than by having first complied with the provisions of the Act and the Regulations.

Regulation 9(2) of the regulations provides:

A landlord under an eligible lease must not evict or attempt to evict a tenant under the eligible lease to whom sub-regulation [9(1)] applies.

As noted, an eligible lease under the Act, being a lease that therefore had the protection of the rent relief provisions of the Regulations, was one that was in effect on 29 March 2020. The Tribunal found in this case that there was no serious question to be tried concerning the right of the landlord to bring the lease to an end by re-entry on 27 March 2020, and as a consequence the Tribunal found that there was no serious question to be tried concerning the right of the tenant to the protections against ejectment provided by the Covid-19 legislation.

As well as injunctive relief, the tenant claimed in the alternative relief against forfeiture. 

The landlord submitted that as to the future rent, the tenant may not be able to pay it for months or years as its capability of doing so, being linked to the tenant’s turnover, would require the tenant promptly to operate at the same level as the period prior to the onset of the Covid-19 pandemic. 

The Tribunal concluded that the tenant did not intend to seek relief from its obligation to pay rent and outgoings pursuant to the Covid-19 legislation, such that the amount of rent payable by the tenant until its business started operating again would be a matter for determination, failing agreement between the parties.  

The Tribunal accepted the evidence of the tenant’s director to the effect that the tenant is enrolled in the JobKeeper Scheme, and that the director is an “eligible business participant” engaged in the business of the tenant and entitled to receipt of the Jobkeeper payment. The Tribunal also accepted that the tenant qualified for the JobKeeper Scheme, as “carrying on business” in Australia on 1 March 2020, notwithstanding the landlord having taken possession of the premises on 27 February 2020. 

However, the Tribunal concluded that in regard to the tenant's obligation to pay rent and other amounts in arrears as a condition of the granting of relief against forfeiture, there was no serious question as to whether the tenant was entitled to take advantage of the rent relief provisions contained in the Covid-19 legislation. The Member accepted the landlord's submission that the lease was not an “eligible lease” within the meaning of section 13 of the Act because there was no serious question as to whether it was in effect on 29 March 2020. The tenant would therefore not be entitled to any rent relief or relief from any liabilities under the Covid-19 legislation.

Ultimately the Tribunal granted the tenant’s application for relief against forfeiture on the basis that all rent and outgoings that would otherwise have been paid by the tenant to the landlord to the date of the decision, had the landlord not taken possession when it did, must be paid by the tenant as a condition of granting relief.

This case shows the analysis that the Tribunal must undertake in order to determine whether a case falls within the moratorium granted by the  Code of Conduct and the Act and regulations created under it. 

W G Stark 

Hayden Starke Chambers

When will a hand-written licence to occupy premises in a contract of sale of real estate be enforceable?

1.     In CAG Company P/L v Cheruku and anor [2020] VCC 13, the County Court (Marks J) considered the interpretation of a handwritten clause in a contract of sale of real estate allowing the purchaser to take possession of the property being sold 5 and 1/2 months before settlement.

 

2.     The plaintiff agreed to sell its Coburg North property to the defendants in February 2019, for $1.37 million, with settlement to take place some seven months later, on 1 September 2019. The contract of sale included a handwritten clause, which was added by the plaintiff’s real estate agent and initialled by the defendants when they signed the contract of sale on 9 February 2019.

 

3.     The precise wording of the hand-written clause was:

The Vendor allows the purchaser to take possession of the property

under lease LICENCE agreement on the March 20th March [sic] 2019 at $700 per week until Settlement.

 

4.     Settlement eventually occurred on 2 September 2019 and the defendants moved in. They did not take possession before settlement.

 

5.     The dispute (the value of which was $16,500) was over whether the defendants were obliged to pay the licence fee or not.

 

6.     The plaintiff vendor submitted that the clause was ambiguous. It said that it could mean that the $700 per week payment it sets out was mandatory (payable regardless of whether the defendants took possession before settlement) – or that it was permissive (only payable if the defendants took possession before settlement).

 

7.     The plaintiff then argued that where a clause is ambiguous and there is a constructional choice as to how it is interpreted, that ambiguity may be resolved by considering pre-contractual negotiations in order to establish the parties’ objective intentions. Finally, the plaintiff submitted that the pre-contractual negotiations established that the parties’ objective intentions were that payment was mandatory. The fact the defendants did not take possession is irrelevant: the fee provided for by the clause was payable in any event as a fee for the opportunity to take possession.

 

8.     The defendants, on the other hand, argued the handwritten clause was not ambiguous. It permitted the defendants to enter the property under a licence agreement but it did not compel them to do so, nor did it create a liability to pay if they had not entered the property before settlement.

 

9.     The lawyers for the vendor must have realised that there was a problem with the clause as drafted by the estate agent, and after the contract of sale was signed proceeded on the basis that the defendants were required to sign a further agreement, described as a ‘Licence Agreement’ which included extensive terms not provided for in the contract of sale.

 

10.  At paragraph 31, of the judgment Her Honour noted:

… the plaintiff did not offer the defendants possession of the property on or from 20 March 2019 based on the handwritten clause. On the contrary, they issued proceedings seeking to force the defendants to sign the Licence Agreement.

 

11.  It was not until trial that the plaintiff claimed that $16,500 was due to it as a debt because of the handwritten clause.

 

12.  This allowed the judge to conclude that the parties had not reached agreement. She found (at paragraphs 34 to 35):

 

… it is for the plaintiff to show, on the balance of probabilities, that it

has established the precondition to the debt claim it now pursues.

 

35 It has not. On its construction of the handwritten clause, in order to succeed on its claim it needs to establish that after the contract of sale was executed it offered the defendants possession based on that clause. It needs to show it was ready, willing and able to offer possession – without requiring as a further condition of possession that the defendants agree to further conditions not contemplated in the contract of sale. It did not show that.

 

13.  Her honour went on to explain the meaning of the hand written clause. She noted at paragraph 36 that the clause was “unambiguous". The word allows is clearly permissive.

 

14.  Following on from that construction, Judge Marks concluded (at paragraph 38, emphasis added):

The proper construction of the clause is that the plaintiff is giving the defendants the opportunity to take possession of the property under licence from 20 March 2019, at the cost of $700 per week until settlement if they take possession.

 

Conclusion

15.  With all due respect to real estate agents in Victoria, they should be leaving the drafting of unusual terms in Contracts for the Sale of real Estate to lawyers.

 

16.  The ambiguity in the licence clause shows that it is imperative that the drafting of such a clause is clear, as well as concise.

 

17.  The vendor’s lawyers clearly recognised that the hand written clause was inadequate, which led to their attempt to renegotiate the clause and its effect by drafting a more detailed licence agreement. Unfortunately, the evidence showed that no agreement could be reached about the terms of the proposed licence agreement, and so it seems that the vendor ‘jumped the gun’ in seeking to enforce the licence agreement, leading to unnecessary (and ultimately unsuccessful) litigation.

WG Stark

Hayden Starke Chambers