Do COVID-19 lockdowns frustrate leases?

The past weekend’s expanded greater Sydney shutdown may have you wondering about frustration and lockdowns. Can a tenant, who is legally unable to trade, reasonably argue the lockdown has frustrated their lease, bringing it to an end? Can a landlord do likewise? In short – no, and we explain why below. 

Frustration

A frustrating event terminates a contract, not at a party’s election, but automatically. Such an event, and if not caused by a party’s default, must create a ‘radically different’ environment from that originally contemplated. This includes where the contract’s performance becomes impossible, suggesting a possible analogy with the current COVID-19 lockdowns. Take, for example, a cinema chain banking on weekends of decent box office and snack sales, only to miss out on showing Black Widow, and maybe soon Top Gun: Maverick.

However, COVID-19 and related lockdowns are unlikely to frustrate leases and other land-based contracts because:

• traditionally, frustration has limited application to leases and other land-based contracts. Cognisant of this, leases generally deal with interruptive events, such as premises being damaged or services lost, etc., with retail leases having mandated arrangements under the Retail Leases Act 1994. Other leases may have break clauses, and land sale contracts and call options may have rescission rights
• legislation is also relevant, with lockdown legislation giving tenants, and to a lesser extent, landlords, relief. These laws are predicated on leases remaining in place, taking it that there is no frustrating event
• the current lockdowns are restraining infectious diseases spreading, which is a legitimate governmental tool. Parties enter leases on this understanding – governments do this sort of thing, even if immensely disruptive. This counts against the disturbance being frustration. This is similar to councils doing footpath works in front of a tenancy, which will not usually end a lease or even require a landlord to compensate their tenants. In other words, while the situation is unwanted, frustration does not follow
• if lockdowns caused frustration, whole classes of leases would become frustrated. Take, for example, restaurant leases where the tenants providing takeaway is not realistic – have all these leases ended, and automatically? If so, the consequences would be devastating for employees, tenants, landlords, suppliers, diners, etc. This is why courts are slow to find frustration – it is not often not desirable
• frustration is measured when the event occurs – in this case, the lockdown – not once the economic consequences are known.

We hope this short overview provides some guidance to tenants and landlords during a stressful and ongoing situation. If you have any questions about your leases, please get in touch with us.

Author: Bede Haines

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Bede Haines

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