Duncan Kynoch looks at coronavirus property closure: Can tenants who are forced to close suspend their rent during the lockdown?

06.04.2020

“Can I stop, or suspend, my rent payments during the current Covid-19 lockdown?”

Duncan Kynoch addresses this burning question for many tenants (and indeed landlords facing rent reductions/cessation) who have, by Government Regulation, been required to close their businesses (on pain of committing a criminal offence). Except for supermarkets, convenience stores, pharmacies, and one or two other exceptions, most premises carrying on a business venture of any kind have been forced into closure. Many businesses, whose income has fallen (essentially overnight to zero by reason of the closure) may be in a fight for survival as they deplete their cash reserves in order to meet their operating expenses (only some of which will be met by the Government’s recent pledge to meet 80% of furloughed workers wages). The quarterly rent payment, whilst premises are closed, is often the most substantial outgoing a business has to meet. This is particularly so now where the Government has given a business rate holiday to many businesses.

SUMMARY

The conclusion of this article will be that, in many cases (but depending on the precise terms of each lease) there may be grounds for tenants, who have been forced to close, to suspend their rent payments during the currency of this lockdown. The legal basis for this is set out below.

THE LAW AND THE REGULATIONS

Although the current restrictions both on the ability of businesses to open, and freedom of movement, are unprecedented, there are lessons to be drawn from history where Governments in times of war, or strike, have passed Acts of Parliament to force the cessation of certain enterprises and ventures.

The legal framework for these arguments is founded on principles of “supervening illegality”, which falls within the legal doctrine of frustration.

The starting point is the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (“The Regulations”), a statutory instrument (SI) enacted at 1pm on 26 March 2020, in response to the 2020 COVID-19 pandemic.

The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020

The Regulations are the most severe restrictions on civilian life in England since World War II. There are similar SIs for Wales, Scotland and Northern Ireland.

The new laws broadly reflect the Prime Minister’s statement on Monday (23 March 2020) and legalises the forced closures of non-essential businesses, lists the permitted shops which can remain open and introduces new police powers of enforcement.  The full Regulations can be found at: https://www.legislation.gov.uk/uksi/2020/350/contents/made.

Part 1 of Schedule 2 of the Regulations lists those businesses (food and drink) which must close during the emergency period, except for the purposes of selling takeaway food. This includes all restaurants, cafes, bars and pubs. There are a number of exceptions to this restriction, such as those cafes or canteens at a hospital, care home, school, prison or army bases, as well as services providing food or drink to the homeless. Canteens at the workplace can only remain open where there is no practical alternative for staff at that workplace to obtain food.

Part 2 of Schedule 2 of the Regulations lists those businesses which must close with no exceptions. This includes: cinemas; theatres; nightclubs; bingo halls; concert halls; museums and galleries; casinos; spas; nail, beauty, hair salons and barbers; massage parlours; tattoo and piercing parlours; skating rinks; indoor fitness studios, gyms, swimming pools, bowling alleys, amusement arcades and soft play areas or other indoor leisure centres and facilities; funfairs (whether outdoors or indoors) playgrounds, sports courts and outdoor gyms, outdoor markets (except for stalls selling food), car showrooms, auction houses; premises allowing provision of holiday accommodation, whether in a hostel, hotel, bed-and-breakfast accommodation, holiday apartment, home, cottage or bungalow, campsite, caravan park or boarding house. The list speaks for itself. It clearly forces the shut down of vast swathes of the British economy.

In addition, the Regulations (Reg 6) impose significant restrictions on movement that “no person may leave the place where they are living without reasonable excuse” (which is: to obtain basic necessities, including food and medical supplies for the family or for vulnerable persons; take exercise either alone or with other members of their household; to seek medical assistance, travel for work where it is not reasonably possible for that person to work, or to provide those services, from the place where they are living, to move house where reasonably necessary).

The “emergency period” started when the Regulations came into force (26 March 2020) and will continue until such day and time as directed by the Secretary of State. The Secretary of State has the power to lift the restrictions in its entirety or in relation to certain categories of businesses as deemed necessary. The Secretary of State must review the restrictions every 21 days, the first review being carried out on the 16 April 2020.

By Regulation 9 any person who contravenes the regulations, without reasonable excuse, commits a criminal offence. Closure is “mandatory” therefore, enforced by the criminal law. There are no “discretionary” exceptions. It is, accordingly, illegal for any person to seek to carry on any business referred to above until (at least) 16 April 2020, and maybe longer.

Frustration & Leases

Frustration is concerned with unforeseen, supervening events, not events which have been anticipated and provided for in the contract (or lease) itself.

A contract is frustrated where, without fault of either party, and for which the contract makes no sufficient provision, an event occurs which so significantly changes the nature of the outstanding contractual rights from what the parties could reasonably have contemplated when the contract was made that the contract is discharged (National Carriers Ltd v Panalpina (Northern) Ltd [1981] A.C. 675).

In Panalpina, the House of Lords held that the doctrine of frustration is in principle applicable to leases. Lord Wilberforce in Panalpina (at 697) observed that the doctrine:

“must be so applied with proper regard to the fact that a lease, that is, a grant of a legal estate, is involved. The court must consider whether any term is to be implied which would determine the lease in the event which has happened and/or ascertain the foundation of the agreement and decide whether this still exists in the light of the terms of the lease, the surrounding circumstances and any special rules which apply to leases or to the particular lease in question”

In Francis v Cowcliffe Ltd (1976) 33 P. & C.R. 368 Rubin J. has accepted “that the doctrine of frustration can apply to a covenant in a lease so long as it creates a continuing or future obligation” (at 372).

In Davis Contractors Ltd v Fareham UDC [1956] AC 696 Lord Radcliffe at paragraph 729 said this of frustration:-

“frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”

 

In Cricklewood Property & Investment Trust Ltd v Leighton’s Investment Trust Ltd [1945] A.C. 221, Viscount Simon LC defined frustration in the following terms:

“Frustration may be defined as the premature determination of an agreement between parties, lawfully entered into and in course of operation at the time of its premature determination, owing to the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by the law both as striking at the root of the agreement, and as entirely beyond what was contemplated by the parties when they entered into the agreement. If, therefore, the intervening circumstance is one which the law would not regard as so fundamental as to destroy the basis of the agreement, there is no frustration. Equally, if the terms of the agreement show that the parties contemplated the possibility of such an intervening circumstance arising, frustration does not occur. Neither, of course, does it arise where one of the parties has deliberately brought about the supervening event by his own choice”.

Viscount Simon LC further held:

“Where the lease is a simple lease for years at a rent, and the tenant, on condition that the rent is paid, is free during the term to use the land as he likes, it is very difficult to imagine an event which could prematurely determine the lease by frustration – though I am not prepared to deny the possibility, if, for example, some vast convulsion of nature swallowed up the property altogether, or buried it in the depths of the sea. The lease, it is true, is of the “site,” but it seems to be not inconceivable that, within the meaning of the document the “site” might cease to exist. If, however, the lease is expressed to be for the purpose of building, or the like, and if the lessee is bound to the lessor to use the land for such purpose with the result that at the end of the term the lessor would acquire the benefit of this development, I find it less difficult to imagine how frustration might arise. Suppose, for example, that legislation were subsequently passed which permanently prohibited private building in the area or dedicated it as an open space for ever, why should this not bring to an end the currency of a building lease, the object of which is to provide for the erection on the area, for the combined advantage of the lessee and lessor, of buildings which it would now be unlawful to construct? It is no answer to say that it may be presumed that the legislature would make express provision, by compensation clauses or otherwise, to deal with such a case: we are entitled to test the applicability of the doctrine by assuming supervening illegality, without any qualification”

What Viscount Simon LC had in mind here was legislation which “permanently prohibited” a certain use of premises. But, what then is the effect of legislation (or regulations) which “temporarily” prohibits all use of the premises by requiring closure. Is there room for the doctrine of frustration, or supervening illegality, to operative in a “suspensory” way, rather than discharging the lease (which is the usual consequence of frustration)?

It is instructive to look at common clauses in most modern leases which may impact on this question.

Most modern commercial leases do indeed expressly provide for a “permitted use”, and often the tenant covenants “not to use the Premises otherwise than for the Permitted Use”. For example, most leases of gyms will have a “permitted use” clause to “use as a fitness centre within Use Class D2”. Most modern commercial leases do not fall into Viscount Simon’s “free during the term to use the land as he likes” as they have prescribed user covenants.

As well as user covenants, most commercial landlords covenant to allow a commercial tenant to “peaceably and quietly enjoy the Premises”. The basis of it is that the landlord, by letting the premises confers on the tenant the right of possession during the term and impliedly promises not to interfere with the tenant’s exercise and use of the right to possession during the term” (Kenny v. Preen [1963] 1 Q.B. 499, 511 per Pearson L.J).  It would be said by a landlord that, if legislation prohibits the use and enjoyment of the premises, then such a landlord is not in breach of a quiet enjoyment covenant because such deprivations visited on the tenant are not his acts, but arise by virtue of an Act of Parliament (viz. the Regulations in this case).

In addition, many leases contain a covenant along the following lines:

“no warranty is given by the Landlord that the Premises case be lawfully used for any purpose authorised by this Lease or otherwise”.

Thus, it will be said by landlords, if such a clause is present in the lease, that if legislation prohibits a certain user, and that user is authorised in the user covenant, the landlord is not in breach of covenant because it has not “warranted” that the premises may be lawfully used for that purpose. It has also been held that a covenant restricting the tenant from using the premises for any purpose except a specified purpose or requiring him to use them for a specified purpose does not constitute a contract, warranty or condition by the landlord that the premises may lawfully be used for that specified purpose (Hill v Harris [1965] 2 Q.B. 601, applying Edler v Auerbach [1950] 1 K.B. 359: where it was held that there was no implied term that premises were fit for the purpose for which they were let).

However, in answer, the tenant may argue that the effect of the Regulations is not to prohibit a specific user, but to prohibit all use of given premises and requires the tenant to close. The Regulations concern not use, therefore, but closure for all purposes where those premises have been carrying on the prohibited businesses (e.g. pub, restaurant, gym etc). The Regulations therefore go much further than restricting any particular use, but fundamentally denies the tenant the essence of his bargain viz. his enjoyment and possession of the premises. It is not as if the tenant can, in response to the Regulations, swiftly adapt the premises for some other non-prohibited business (like a supermarket or convenience store). If the premises have been carrying on a prohibited business (e.g. pub, restaurant, gym, or any of the prohibited ventures) then they must close. In any event, it would be unreal to expect the tenant in the short time between the announcement of the Regulations, and their coming into force, to adapt the premises to a non-prohibited use. There is therefore a powerful argument that “no use warranty” clauses deal with a situation where premises are being used in a particular way, not where an Act of Parliament mandates closure and no use at all.

Where does this lead us to? The authors view is therefore that the “no user warranty” clauses” and “quiet enjoyment” covenants do not assist because such clauses do not contemplate what we are dealing with here, namely: forced closure of premises by pandemic.

There is no reported English case on frustration, or supervening illegality, by pandemic. However, assistance can be derived from some of the well known frustration cases.

The “coronation cases” (cases arose from the cancellation of coronation events due to King Edward VII’s ill-health) provide examples of where frustration has been considered: Krell v Henry [1903] 2 KB 740 and Herne Bay Steam Boat Company v Hutton [1903] 2 KB 683. In Krell the contract (hire of a flat) was held to be frustrated; in Herne Bay (hire of a boat) it was not. The difference in the result between the two cases was because there was held to be an implied term in Krell that the coronation would go ahead.

Of interest in relation to Covid-19, Vaughan Williams LJ at paragraph 691 in the Herne Bay case gives as an example of “the spread of an infectious disease” where he held:

“I see nothing that makes this contract differ from a case where, for instance, a person has engaged a brake [i.e. taxi] to take himself and a party to Epsom to see the races there, but for some reason or other, such as the spread of an infectious disease, the races are postponed. In such a case it could not be said that he could be relieved of his bargain.”

 

Frustration discharges/terminates the lease, and does not merely suspend performance, so the courts will always look at the length of the lease itself, and compare it to the period of the prohibited activity. This is illustrated by the SARS outbreak case Wing v Xiong (DCCJ 3832/2003, Hong Kong District Court) where a 10-day isolation order prevented the Claimant from reaching his flat in Kowloon, Hong Kong. The Claimant said that this frustrated the lease, and discharged him from having to pay any further rent. The court disagreed because the lease was for 2 years. A 10-day exclusion from the property was “insignificant” in that context (see paragraph 11). It might have been a different result, however, if, for example, the Claimant had been holding over from month to month on a period tenancy, or the isolation order had been more than an “insignificant” period of his lease.

However, against this, it has been held that where the supervening event is “temporary” and insufficient to amount to a frustration of the lease as a whole, it is possible that a covenant which is temporarily impossible to perform would be “suspended” until it became possible to perform it (see Woodfall at 17.283). Lord Russell at 233 in Cricklewood Property held:

“It may well be that circumstances may arise during the currency of the term which render it difficult, or even impossible, for one party or the other to carry out some of its obligations as landlord or tenant, circumstances which might afford a defence to a claim for damages for their breach, but the lease would remain. The estate in the land would still be vested in the tenant”.

Can it be said here that the Regulations make it “difficult, or even impossible, for one party or the other to carry out some of its obligations as landlord or tenant”. As was said in Panalpina the court must look to “the foundation of the agreement and decide whether this still exists in the light of the terms of the lease”. What is the foundation of a lease? The foundation of a lease is the grant of land for a term at a rent with exclusive possession” (per Lord Templeman in Street v Mountford [1985] A.C. 809). The entitlement to exclusive possession for a certain term (on the part of the tenant) and the landlord’s entitlement to rent is the essence of a lease (and tenancy) (though rent is invariably a feature of a lease/tenancy but not an essential).  A “demise” or “lease” is the grant of a right to the exclusive possession of land for a determinate term less than that which the grantor has himself in the land (see Woodfall 1.003). Under a lease:

“the tenant possessing exclusive possession is able to exercise the rights of an owner of land, which is in a real sense his land albeit temporarily and subject to certain restrictions. A tenant armed with exclusive possession can keep out strangers and keep out the landlord unless the landlord is exercising limited rights reserved to him by the tenancy agreement to enter and view and repair”  (Street v. Mountford)

Exclusive possession is the ability on the part of a tenant to exclude all persons, including the landlord, from possession (Street). The effect of the Regulations is to “temporarily” suspend the tenant’s right to (exclusive) possession. That being so, if the effect of the Regulations is suspensive of all the rights and privileges accruing to a tenant during the period of their operation (including the tenant’s right to exclusive possession), how can it be said such a frustrating, but suspensory, effect does not also suspend the rights and privileges accruing to the landlord (viz. the right to receive rents) for the period of the suspension. There has to be an element of mutuality in the frustrating suspension. It cannot simply operate against the tenant’s rights and privileges.

Supervening Ilegality

I now turn to the “supervening illegality” cases to see whether the same provide any assistance. In an English law-governed contract, a contract is discharged if its performance becomes illegal by English law.

It seems to the author that the most assistance in the current pandemic can be obtained from the cases where the Government has passed legislation (or subordinated legislation) which makes it a criminal offence to exercise the rights contemplated in the contract, or lease. That is the situation under consideration in relation to the Covid-19 pandemic. Whilst the coronation cases are instructive, they did not involve any element of illegality (or criminality) if performed.

The War Cases

 

In relation to WWII, by the Trading with the Enemy Act 1939 s.1(2), it was a criminal offence to supply any goods to or for the benefit of an enemy, or to obtain any goods from an enemy in time of war. Indeed, both at common law and under this statute, all commercial intercourse between a British subject and an enemy became illegal upon the outbreak of war (WWII). As a result, any existing contract of sale which involved such intercourse by reason of the performance or further performance of the contract is “frustrated” by the outbreak of war, or upon one of the parties acquiring the status of an enemy. Even if the contract contains a clause which suspends its entire operation during the period of war, it nevertheless becomes illegal and is discharged. Moreover, a contract of sale of goods which contemplates the carriage of the goods by sea will be frustrated if the named port of shipment becomes an enemy port (Esposito v Bowden (1857) 7 E. & B. 763).

It is important to make clear that the principle of frustration does not involve the destruction of the contract so far as already performed. That which is abrogated is the further performance of the contract, as from the outbreak of war (Schering Ltd v Stockholms Enskilda Bank Aktiebolag [1946] A.C. 219 at 241, 248). Rights which have already accrued under the contract of sale (e.g. a claim for the price) are not destroyed, though the right of suing in respect thereof is suspended for the duration of the war where the claimant is an enemy (Schering).

 

Other supervening illegality

 

A contract of sale of goods may be discharged by frustration if legislation is passed making further performance of it illegal. The illegality, however, must render the contract impossible of legal performance in accordance with its terms (Denny, Mott and Dickson Ltd v James B Fraser & Co Ltd [1944] A.C. 265; Nile Co for the Export of Agricultural Crops v Bennett (H & JM) (Commodities) Ltd [1986] 1 Lloyd’s Rep. 555) or be of such a character and duration that it vitally and fundamentally affects the nature of the performance contemplated by the parties to the contract when it was made (Denny, Mott and Dickson Ltd v James B Fraser & Co Ltd [1944] A.C. 265; Nile Co for the Export of Agricultural Crops v Bennett (H & JM) (Commodities) Ltd [1986] 1 Lloyd’s Rep. 555.

If the illegality is merely temporary, the contract will not necessarily be frustrated (Andrew Millar & Co Ltd v Taylor & Co Ltd [1916] 1 K.B. 402) but its operation may be “suspended”. In Andrew Millar it was held that “that this was not a case of trading with the enemy, and the contracts had not been annulled but suspended”.

Again, this may be an important passage in the context of the suspensory effect of the Regulations.

CONCLUSION

Each lease must be considered on its own terms.

However, during the currency of the emergency restrictions pursuant to The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020, the tenant is deprived of the use, occupation, and enjoyment of the premises, and the right to carry on the venture expressly contemplated in the “permitted user” provisions of the lease. This change is of “such a character and duration that it vitally and fundamentally affects the nature of the performance contemplated by the parties to the contract when it was made” (Denny, Mott and Dickson Ltd v James B Fraser & Co Ltd [1944] A.C. 265. Whilst it is unlikely (particularly for longer leases) that the court would hold that a lease is “frustrated” (i.e. discharged/terminated) by the Regulations, there is support in the case-law (see: Cricklewood Property & Andrew Millar) that the effect of these Regulations, which are suspensory of the tenant’s rights under a lease, are such a fundamental, unforeseen, and uncontemplated change of circumstances, striking at the root of the bargain struck between landlord/tenant, that the courts may relieve both parties (landlord and tenant) of performance during the period of what would otherwise be an illegal use of the property.

In these circumstances, the tenant may be best advised to suspend rent payments until the emergency regulations are lifted; or otherwise enter into negotiations with his/her landlord to agree new terms mutually acceptable to both parties during the lockdown.

If you have any questions in relation to the article please contact duncan.kynoch@selbornechambers.co.uk.

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