Frustration and force majeure in property contracts: an English law perspective
Back to Real Estate Committee publications
Christopher Bartley
Mills & Reeve, London
christopher.bartley@millsreeve.com
Similar to most jurisdictions around the world, the United Kingdom experienced severe supply chain disruption during the earlier stages of the Covid-19 pandemic. The situation was then exacerbated by the UK entering into an enforced period of lockdown in an attempt to slow the spread of Covid-19.
On 20 March 2020, UK Prime Minister Boris Johnson announced that legislation would be enacted requiring cafes, bars and restaurants to close. Shortly afterwards, on 23 March 2020, the UK government imposed a lockdown which substantially restricted everyday life. Those restrictions are being gradually lifted but remain subject to continuous monitoring. Parts of the UK may also be subjected to local lockdowns, which has happened already in Leicester, if the rate of new infections becomes too high.
The impact of these developments cannot be overstated. In the context of property contracts, the disruption caused and restrictions imposed have made it difficult for many parties to fulfil the contract for which they bargained prior to the pandemic. This article looks at areas in English law which have become a focal point in recent months where parties have been unable to enjoy or perform the whole or a substantial part of a contract relating to property.
Frustration
At the far end of the spectrum is the doctrine of frustration, where something happens subsequent to the formation of a contract which renders its performance impossible, or only possible in a very different way from that originally contemplated. The doctrine of frustration operates to excuse the parties from further performance.
[1]
Frustration can apply in principle to leases
[2] and contracts for the sale of land, but does so very rarely. In
Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), the European Medicines Agency (EMA) was unsuccessful in arguing that Brexit frustrated its lease in Canary Wharf, London. The EMA could still perform its obligations under the lease and it could assign or sublet the lease to a third party.
In order to frustrate a lease or a contract for the sale of land, the intervening event must render performance impossible or only possible in a very different way. The pandemic, while incredibly disruptive and far-reaching, will rarely do that. The rights, obligations and subject matter remain in place. It is rather that the benefit derived from the contract has been severely curtailed (for one party or both) for a temporary period of time.
It could be argued that a lease for a short term could be frustrated if the pandemic renders impossible the performance of the lease for the entirety of its term, although the circumstances in which that argument might arise will be unique.
Another aspect of frustration is that it brings the contract to an end. That will not suit many tenants who wish to suspend their obligation to pay rent, but not to end their lease entirely.
Illegality
Closely linked to frustration is illegality. In English law, a contract is discharged if its performance becomes illegal by English law.
The illegality must prohibit performance. It is not enough if performance is prevented temporarily or if performance is made more difficult.
[3] This distinction may preclude reliance on the illegality doctrine.
Force majeure
Frustration and illegality will apply very rarely, therefore, but some contracts expressly provide for performance to be excused if impacted by certain events. These force majeure clauses have gained much attention in recent months.
Under English law, the applicability of force majeure is contractual. The contract will define the events which engage the clause. The contract will also set out the parties’ rights and obligations upon the occurrence of those events.
It is for the party seeking to rely upon the provisions to show they apply, and the provisions are usually construed narrowly. For example, many issues relate to efforts to restrict the spread of the virus rather than the virus itself. The precise wording of the clause requires very careful reading.
The key point is whether the Covid-19 pandemic and its consequences fit within the wording of the particular force majeure clause, assuming that the property contract in question has one.
Some may temporarily suspend obligations following an ‘act of God’ which must:
[4]
-
be due to natural causes, directly and exclusively without human intervention;[5] and
-
which could not have been foreseen, or, if foreseen, could not by any amount of human care and skill have been resisted.[6]
It could be argued that Covid-19 is not a natural event in its purest form because it is spread by people. That said, there are examples in English law of the courts finding that an illness can be an act of God.
[7]
A force majeure clause may also include events such as an outbreak of infectious disease; or indeed a shortage of labour or materials following an event which is beyond the control of the parties.
It should be noted that force majeure clauses are found rarely in modern leases but, following the disruption caused by Covid-19, tenants are seeking to incorporate such clauses into new leases. Some buyers are also seeking to make contracts for the sale of land conditional upon the Covid-19 pandemic receding.
For existing leases, such clauses tend to be found in an amended form within provisions relating to insurance. In certain circumstances, the obligation upon the tenant to pay rent will be suspended for and so long as the property is rendered unfit for occupation by an insured event. Although many such clauses require there to be damage or destruction to the property and there is some debate about whether Covid-19 causes damage to the property itself.
This uncertainty extends to attempts by companies to rely on their business interruption insurance policies. The Financial Conduct Authority is seeking a court declaration on the interpretation of a representative sample of business interruption policies where cover is not dependent on there being physical damage to the property.
The purpose behind the case is to bring greater clarity to this issue. There are some limitations because the decision will be based on the wording of each sample policy wording rather than based on principles which can be applied to all insurance policies. Nonetheless, a broad sample of policy wording has been put forward and so the case represents a step forward in the search for greater certainty on the issue.
[1]Halsbury’s Laws of England (LexisNexis, 5th Edn), Vol 22, 7-259.
[2]National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, [1981] 1 All ER 16.
[3]Waugh v Morris (1872–73) LR 8 QB 202.
[4]Halsbury’s Laws of England, 5th Edn, Volume 22, 7-269.
[5]Lord Mansfield CJ in Forward v Pittard (1785) 1 Term Rep 27 at 33: the act of God is 'something in opposition to the act of man'.
[6]Nugent v Smith(1876) 1 CPD 423 at 434, CA.
[7]For example, Boast v Firth [1868–69] LR 4 CP 1.
Back to Real Estate Committee publications