Archive for the ‘leases’ Category

Brexit and the doctrine of frustration

March 31, 2019

Introduction

In Canary Wharf (BP4) T1 Ltd v European Medicines Agency ([2019] EWHC 335) Marcus Smith J considered the claim of the European Medicines Agency (‘the EMA’) that Brexit (should it occur) would be an event that would frustrate the EMA’s lease of its office premises in Canary Wharf.

Marcus Smith J first considered the juridical basis of the doctrine of frustration. He then  considered whether either a ‘No Deal Brexit’ or Brexit under the terms of the Withdrawal Agreement negotiated between the British Government and the European Union would frustrate the lease.

This blog post outlines the general discussion of the law of frustration. A second blog post will look at how Marcus Smith J. applied the law to the facts of this case.

Brief outline of the facts of the case

Canary Wharf granted EMA a lease of office premises in Canary Wharf (‘the premises’) for a term of 25 years from 21 October 2014. The EMA could assign or sub-let the premises, subject to compliance with the provisions in the alienation clause in the lease.

The EMA wrote to Canary Wharf on 2 August 2017 informing Canary Wharf that, ‘when Brexit occurs, we will be treating the event as a frustration of the lease’. Canary Wharf sought a declaration that Brexit (the withdrawal of the United Kingdom from the European Union) would not cause the lease to be frustrated.

The doctrine of frustration

‘The doctrine of frustration operates to bring a contract prospectively to an end because of the effect of a supervening event’ ([21]).

While there is no numerus clausus of frustrating event, they include:

  • frustration of a common purpose; and
  • subsequent legal changes and supervening illegality ([41])

Frustration of a common purpose

The essence of the doctrine is that a contract is frustrated when performance would be ‘radically different’ from what the parties had envisaged ([27]; Davis Contractors v Fareham UDCNational Carriers v Panalpina).

The search then is for what the parties have promised and whether performance would fall within the scope of their promises. Contractual interpretation is highly relevant to the question of whether a supervening event means that performance goes beyond what has been promised. Many disputes will turn out to be about contractual interpretation.

In frustration cases, however, the search is for ‘something much more elemental’ which can be described as the parties’ ‘common purpose’ ([29]).

In Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd
(The “Sea Angel”),
Rix LJ said:

‘In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances    …. there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances’ ([111]).

This multi-factor approach (in particular the third factor) goes beyond what would be relevant if the question were purely one of contractual interpretation.

Marcus Smith J. refers to Krell v Henry to illustrate the sort of case in which the parties could have been said to have a common purpose underlying their contract:

‘Their common purpose was just that: whilst the parties surely would have been in opposition in bargaining on price, the thing that they were bargaining about was predicated on the procession taking place. Matters would have been very different had the room been a hotel room charging a higher rate because of the higher demand for rooms on that particular day due to the Coronation.’ ([37]).

The ‘demands of justice’ are a factor:

‘If the provisions of a contract in their literal sense are to make way for the absolving effect of frustration, then that must, in my judgment, be in the interests of justice and not against those interests’ (Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The “Sea Angel”) at [112]).

Subsequent legal changes and supervening illegality

Marcus Smith J explained that:

‘The EMA’s contention that the Lease was frustrated by supervening illegality, taken at its highest, involved the proposition that, after withdrawal of the United Kingdom from the European Union, it would no longer be lawful for the EMA to pay rent to CW pursuant to the Lease. The payment of rent would be unlawful because the EMA would – in paying rent – be acting ultra vires or without capacity’ ([96]).

Outlining the relevant law, he noted that:

‘Supervening illegality means more than simply Patel v. Mirza type illegality: it can arise where the performance of a contract becomes unlawful for one party by reason of a supervening change in law or by reason of a supervening change of circumstance rendering that which was previously lawful unlawful’ ([170]).

Where the illegality is the result of a foreign law

Marcus Smith J. considered the EMA’s case on the assumption that it had made out its case that the payment of rent would be ultra vires the EMA. This illegality would arise from EU law:

‘This is a case where the supervening illegality arises under a foreign law that is not the applicable law. Generally speaking, the validity and enforceability of a contract governed by English law is not as a general rule affected by the question whether the contract would be regarded as valid or whether its performance would be lawful according to the law of another country. The English law of frustration discounts illegality arising under a foreign law, save for certain limited exceptions.’ ([187])

Thus:

‘The question, then, is whether – assuming that the EMA is right as regards the points it makes on vires – these are relevant for the purpose of frustration by way of supervening illegality. The question is whether the English law of frustration, which has regard to questions of legality where the performance of the contract would be unlawful according to the law of the place of performance, should also have regard to the law of incorporation, at least where this affects the capacity of a party to continue to perform obligations under a transaction lawfully entered into by it.’ ([188])

Marcus Smith J. declined to extend English law in this way ([189]).

What if performance was ultra vires and this was relevant in English law?

Even if the EMA had succeeded on supervening illegality thus far, that would not be the end of the analysis:

‘for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract.’ ([195])

Self-induced frustration

‘Self-induced frustration’ does not frustrate the contract:

’43 Of the five propositions identified by Bingham LJ in The Super Servant Two as not open to question, two might be said to relate to self-induced frustration:
(1) Proposition 4, that frustration should not be due to the act or election of the party seeking to rely on it; and
(2) Proposition 5, that the frustrating event must take place without blame or fault on the side of the party seeking to rely upon it.

44 Whether frustration is self-induced does not turn on technical questions of duty of care or fault.’

Marcus Smith J. said:

‘When considering whether there has been a frustrating event, it is quite clear that the courts consider the conduct of the party alleging frustration broadly and ask the broad question of whether the supervening event was something beyond that party’s control or within it. “Self-induced frustration” is something of a misnomer. It is simply a reference to post-contractual events and actions which indicate that certain options – that might have ameliorated the frustrating event – have been closed off by the acts or omissions of the party claiming frustration.’ ([206]).

Next posts

The judgment in this case is long, detailed and closely-argued. This post describes the relevant legal principles as articulated in the judgment. Subsequent posts will describe how the law was applied to the facts of this case.

Michael Lower

 

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No waiver where landlord accepts rent after commencing possession proceedings

October 23, 2017

In Evans v Enever ([1920] 2 KB 315) T’s lease contained a forfeiture clause which gave the landlords the right to re-enter if the rent was in arrears or if the tenant became bankrupt. The tenant fell into arrears with the rent and was adjudicated a bankrupt.

The landlords commenced possession proceedings but these came to an end, in accordance with section 212 of the Common Law Procedure Act, when the tenant paid the rent and costs to the landlord. The landlords knew of the tenant’s bankruptcy when accepting this rent.

The landlords then brought new proceedings seeking possession on the grounds of the tenant’s bankruptcy. The question was whether the landlords had waived the right to forfeit when they accepted rent with knowledge of the bankruptcy.

It was held that they had not. The landlords’ action in bringing the first possession proceedings was an irrevocable election to determine the lease. The subsequent acceptance of the rent could not qualify this.

Michael Lower

Repairing covenant and the removal of a handrail from a staircase

July 3, 2017

In Dodd v Raebarn Estates Ltd ([2017] EWCA Civ 439, CA (Eng)) Mr D was staying in a friend’s first floor flat. He died after falling while walking down the staircase leading from the flat to the ground floor.

Raebarn owned the freehold of the building. Part of the building was sub-let to an intermediate landlord which had granted further sub-leases of individual flats. The intermediate landlord had, with Raebarn’s consent, altered the building. It removed two existing staircases and replaced them with a new staircase.

The staircase as built did not conform to the plans approved by the local authority in that it seemed likely that the new staircase never had a handrail.

Mrs D brought proceedings against Raebarn under section 4(4) of the Defective Premises Act 1972. Under section 4(4) Raebarn could only be liable if the fact that the new staircase had no handrail amounted to a failure to maintain or repair the property. The question, then, was whether the lack of a handrail amounted to disrepair.

Lewison LJ gave the main judgment with which the other members of the Court of Appeal agreed. The obligation to repair only arises when the demised premises are out of repair ([16]). The duty to repair is not a duty to make safe ([17]). Where, however, there is a need to repair, the work must be carried out in accordance with any applicable regulations and in accordance with standards of good practice at the time that the work is carried out ([25]).

Mrs D’s argument was that the removal of the original staircases was a deterioration in the property giving rise to a need to repair them. The repair works had to be carried out to the requisite standard. The missing handrail meant that they did not satisfy this standard. There had therefore been a failure to maintain and repair the property so that Raebarn was liable under s. 4(4).

This argument failed. The work on the staircases did not give rise to a lack of repair since the head-lease contemplated that such work might be carried out with Raebarn’s consent.

Once the new staircase had been installed, the repairing covenant applied to the staircase as altered. Had it deteriorated? It had not if there had never been a handrail.

Even if the altered staircase had once had a handrail which had been removed, it did not necessarily follow that the staircase was in disrepair. If there was no disrepair, the duty to carry out repairing works to the requisite standard never arose.

Michael Lower

Relief from forfeiture will ordinarily only be granted once during a lease term

May 27, 2017

In Ramadour Industries Ltd v Bullen ([2017] HKEC 974, CA) L granted T a lease of a house on Lamma Island for a two year term. T fell into arrears with the rent but was granted relief from forfeiture. T quickly fell into arrears again and L brought new proceedings seeking possession. T sought relief from forfeiture a second time but this was refused.

The Court of Appeal (Yuen JA giving the court’s judgment) upheld this refusal. The court’s power to grant relief is now codified in section 21F of the High Court Ordinance. Section 21F(1A) provides that relief will only be granted to a tenant once during the term, ‘unless the Court is satisfied that there is good cause why this section should apply in favour of a lessee’.

The intention is clear: relief pursuant to section 21F will normally only be granted once to a tenant during a lease term. The onus is on the tenant trying to invoke section 21F for a second time during a term to show that there is good cause.

Michael Lower

Sale of land as ‘agricultural land’ in the New Territories

March 20, 2017

In Splendid Resources Inc v Secretary for Justice ([2017] HKEC 504) the plaintiffs had constructed columbaria on land owned by them. The Government contended that this was a breach of the terms of the Government lease.

The lease did not contain an express covenant not to use the land for any purposes other than as agricultural land. It had, however, been sold as ‘agricultural land’.  The question was whether this was purely descriptive of the use at the time of sale or implied a covenant only to use the land for this purpose.

Deputy Judge Le Pichon pointed to various features of the New Grant that could only be explained on the basis that the words imposed a restriction on the use to which the property could be put. These included a provision requiring the land to be cultivated.

The judge referred (at [35]) to a statement in Halsbury’s Laws of Hong Kong that ‘[w]ithout special permission from the Government, all Government leases granted in the New Territories are for agricultural purpose and can not be used for other profitable purposes.’

Further, ‘where an interpretative ambiguity arises in the context of a Government lease, a presumption in favour of the Government applies’ (at [36]).

The landowner’s argument that the covenant was purely personal to the original lessee was also rejected.

Finally, Deputy Judge Le Pichon held that the columbarium was a structure; it was a breach of the covenant not to build any structure on the land.

Michael Lower

Agreement determines whether landlords must give credit for security deposit when enforcing a judgment against tenant

February 3, 2017

In Power Plus Ltd v Fruit Design & Build Ltd ([2016] 5 HKLRD 707, LT) the tenant of a flat paid a security deposit of HK$150,000 at the commencement of the tenancy. The forfeiture clause provided that this would be forfeited to the landlord ‘as liquidated damages’ should the tenant be in breach of its obligations under the terms of the lease. The tenant fell into arrears with the rent and the landlord obtained judgment for the sum of HK$105,000. The question was whether the landlord could forfeit the deposit and, in addition, enforce the judgment.

The Lands Tribunal (Judge Wong King Wah) decided that whether this was possible or not depended on the terms of the lease. In this case, on a proper interpretation of the forfeiture clause, the landlord was not entitled to forfeiture and to enforce the judgment without giving credit for it ([15]). The parties’ intention was that the security deposit should be liquidated damages in respect of any claim that the landlord might have against the tenant in respect of the lease.

Michael Lower

Fixed term followed by periodic tenancy: a single term?

January 7, 2017

In Leeds City Council v Broadley ([2016] EWCA Civ 1212, CA (Eng)) a landlord granted a lease for an initial fixed term of six months  and thereafter continuing on a monthly basis until either party brought it to an end by one month’s notice to quit. For Council tax purposes, it made a difference whether the agreement gave rise to a single term or gave rise to two separate leases (a fixed term tenancy followed by a periodic tenancy).

The local authority argued that a single hybrid fixed / periodic tenancy was a legal impossibility since it would lack certainty of term.

This argument failed. Authorities going back to the seventeenth century showed that this kind of arrangement has long been regarded by the common law as a valid lease. The Law of Property Act 1925 (ss. 1(1) and 205(1)(xxvii)) took over the common law position (Lord Templeman in Prudential Assurance v London Residuary Body and Lord Neuberger in Mexfield Housing Co-operative v Berrisford).

According to their terms, these arrangements created a single tenancy and authority showed that this was to be regarded as a valid arrangement.

Michael Lower

Landlord’s repairing covenant: tenant must give the landlord notice of a defect in the property in the tenant’s possession

September 14, 2016

In Edwards v Kumarasamy ([2016] UKSC 40) the UK Supreme Court had to consider the landlord’s liability in respect of physical injury caused to his tenant. The lease was of the interior of a flat in a block of flats. The landlord (K) was himself a tenant of the flat and had the benefit of the right to use the entrance hall to the flats, the car park and the paved area between the front door and the car park. K sub-let the flat together with these ancillary rights to E. E injured himself when he tripped over an uneven paving stone in the paved area.

The primary question was whether the paved area was part of the exterior of the building of which the flat formed part. If it was, then K would be liable to T under the covenant imposed on landlords by section 11 of the Landlord and Tenant Act 1985. Lord Neuberger held that the paved area was not part of the exterior of the building. The natural meaning of the words of a statute should be applied unless they produced a nonsensical result or one which was inconsistent with the intention of the legislation. Here the natural meaning of the ‘exterior’ did not extend to the paved area ([17]).

That effectively meant that the case was decided in K’s favour. Lord Neuberger went on, however, to look at another, more general issue. He referred to the rule that, ‘a landlord is not liable under a covenant with his tenant to repair premises which are in the possession of the tenant and not of the landlord unless and until the landlord has notice of the repair’ ([30]). This is an implied term. It does not normally apply where the premises to be repaired are not in the tenant’s possession ([42]). If the landlord had been subject to a covenant to repair the paved area, did the tenant have to serve notice of disrepair on him before the landlord was under any liability to repair?

The distinguishing feature of this case was that the premises to be repaired were in the possession neither of the landlord nor the tenant but was property over which they both had a right of way. The premises were the paved area over which the landlord had been granted a right of way which he had effectively passed on to the tenant. The landlord had effectively disposed of his right to use the paved area to the tenant ([50]). Lord Neuberger held that the rule requiring the tenant to give notice of the disrepair applied to this case (49]).

Michael Lower

 

 

Does acceptance of rent waive a continuing breach of covenant?

January 13, 2016

In Kwok Hon Shing v Happy Team (China) Ltd ([2015] HKEC 2038, LT) L granted T a four year lease of a unit in an industrial building. There were sub-lettings of part for residential purposes in breach of a covenant not to use the property for residential purposes. These breaches continued even after L’s complaint letter of 12 November 2014. L began forfeiture proceedings in February 2015. The breaches of covenant continued at least until 14 February 2015 but the unlawful sub-tenancies were subsequently terminated. L continued to accept rent until April 2015.

The lease contained a clause to the effect that acceptance of rent would not constitute a waiver of any breach by T. This clause had no effect in this case (if it ever has any effect at all); it could not alter the legal implications of acceptance of rent with knowledge of the breach ([33] – [35]).

In the case of a continuing breach of the user covenant, acceptance of rent only waived the breach up to the date of acceptance of rent. Subsequent breaches were only waived to the extent that L knew at the date of acceptance of rent that they would continue ([42]). The application to forfeit the lease was an unequivocal election to determine the lease and acceptance of rent after that could not amount to a waiver ([47]). L had not waived the breach and was entitled to forfeit. The breaches had, however, been rectified and T was granted relief from forfeiture under section 58 of the Conveyancing and Property Ordinance.

Michael Lower

One tenant in common can bring possession proceedings

July 29, 2015

In Chan Po King v Yau Wai Yin ([2015] HKEC 1283, CA) two out of four tenants in common had granted a two year lease of land expiring on 31 December 2013.The tenant refused to leave when the term ended. One of the two tenants in common who had granted the lease brought proceedings to recover possession and seeking mesne profits in respect of the occupation after the end of the term. The tenant contended that both landlords had to be parties to the proceedings and that one tenant in common, acting alone, could not do so. This argument failed. The lease term had ended and the tenant had no further right to possession. There was no evidence to suggest that the other landlord was willing to allow the possession to continue. The applicant was entitled ‘in exercise of her right and interest to possession as a tenant-in-common’ to bring possession proceedings acting alone ([26] per Chu J-A).

Michael Lower