The Law of Frustration and COVID-19

FRUSTRATED? You might be…

Here we go again.  Legal frustration was in the media during the Brexit saga and now it’s likely to surface another time.

The Law of Frustration

‘Frustration’ can be a legal argument to bring a contract to an early end, without facing sanctions for breach of contract. A party to a contract would have to show that changes in the market make it impossible for them to comply with their contractual obligations.

Rewind one year to my blog about the case of Canary Wharf – v- EMA, which related to premises in England occupied by EMA (European Medicines Agency). EMA tried to get out of the 25 year lease early on the grounds of frustration. They said that Brexit had led to a future which was so radically different from what had been anticipated when signing the lease, they couldn’t reasonably be expected to remain bound by the lease.

The court disagreed, setting a high test bar for proving legal frustration, which remains binding to this day. Even though the court said Brexit was ‘seismic’, that wasn’t enough to frustrate the contract.

COVID-19 Impact

Covid-19 is expected to have a massive global impact, much more than previous outbreaks of viral disease.

My colleague Matt has run a series of blogs about early termination of leases. If you are a tenant with the benefit of a break clause, now may be time to dust off the lease. You need to ensure that you know exactly what your options are and what formalities you’ll need to comply with, if the worst happens and you need to make a swift exit. Too often tenants think they have exercised a break clause properly, only to be tripped up on a formality and bound in for the remainder of the term.

Tenants may be struggling to pay the rent but are currently unlikely to be able to argue a legal right to reduce or withhold rent payments because of a downturn in the market. At the time of writing, markets are largely being impacted by people voluntarily following guidelines rather than being forced to complying with government bans. The situation may change, as already some countries are introducing fines for breaking quarantine. Where actions are dictated by governments, frustration is more likely to be established.

Compromise and Agreement

Compromise is always an option. Contracting parties can always be creative. It may be that as a Landlord, you would be prepared to accept a reduced rate of rent for a limited time, in order to help keep your Tenant trading for as long as possible.

Any such agreement should be documented. Leases are usually ‘executed by deed’ and can therefore only be varied by another deed. A Deed of Variation is a short and simple document which we can prepare. Parties to a contract or deed are always at liberty to agree to change their minds about how they do business with each other, as long as they both consent.

If you would like to find out more, please get in touch with me on 01332364436 or at n.guthrie@timms-law.com.

Nikola Guthrie
March 2020