Property / Real Estate

Frustrated Leases - "If I Can't Get In Why Can't I Get Out?"

A contract is frustrated if an unforseen event makes performance of the contract either impossible or performance is possible only in a radically different way.

The Canterbury earthquakes highlighted the exposure of tenants when their leased premises were tenantable but access to the premises was interrupted because of damage to nearby buildings and/or civil defence cordons. We continue to receive enquiries about whether tenants can bring a lease to an end when there are issues with access to their premises.

As we have addressed in prior articles, the commonly used ADLS lease form provides for a lease to terminate if the premises become untenantable, but unlike the old "BOMA" lease, it does not address the situation where the premises are tenantable but access is prevented or restricted (and nor does the new PCNZ lease). In such circumstances tenants ask if they are able to bring the lease to an end through the doctrine of frustration.

A contract is frustrated if an unforseen event makes performance of the contract either impossible or performance is possible only in a radically different way.

It should be stated at the outset that while, in principle, the doctrine of frustration applies to leases, the cases in which it is likely to succeed are expected to be extremely rare. We are not aware of any reported case of a lease being held to be frustrated in New Zealand although in an oral judgement in Stack Shelf Company Number 16 Ltd v Mathers, Fisher J said "In this case there is a respectable argument that inherent design and construction defects unforeseen by the parties meant that the building had been rendered unsafe, demolition was required ... [and] removed the very subject-matter of the lease... the lease is therefore discharged by frustration." The Judge went on to say that because of a clause in the lease and the way the issues came before the Court... "I think it unnecessary to ventilate that further". So, while an interesting observation, the case was not decided on the issue of frustration.

The leading UK House of Lords case on frustration of leases is National Carriers Ltd v Panalpina (Northern) Ltd (1980). In that case, the tenant could not access the warehouse premises for an anticipated period of 12 to 20 months because the only road access to the warehouse was closed by the local authority due to demolition works required on a dangerous building opposite the leased premises. The tenant, unable to access the warehouse, ceased paying rent. The landlord sought recovery of rent, and the tenant claimed that the leased had been frustrated.

The House of Lords held (contrary to an earlier Court of Appeal case) that the doctrine of frustration was applicable to leases. In National Carriers, one Law Lord, obviously a Gilbert and Sullivan fan, found the doctrine akin to the admissions of the well bred captain of the H M S Pinafore in that if invoked, it could not be said "never" to be applicable but it would "hardly ever" succeed. On the facts before them, having regard to the likely length of the term of the lease after the interruption and in relation to the original term and other factors, the Lords found the lease was not frustrated.

The lease was for a term of 10 years. There were four and a half years remaining. The anticipated interruption of 12 to 20 months due to the road closure would mean there would be three years, or 2/3rds of the remaining term, left after the interruption. The interruption would be only 1/6th of the total term. It was not enough that the tenant was put to considerable expense and inconvenience.

His Lordship, having literary as well as musical interests, referred to the "Compleat Angler" on the subject of strawberries: "Doubtless God could have made a better berry, but doubtless God never did", and added "it does not follow... that He never will..." So while frustration as a remedy is available, no tenant should be confident of succeeding in an application to terminate their lease in reliance on that doctrine except in the most extreme circumstances, as described in the Stack Shelf Company case perhaps.

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The contents of this publication are general in nature and are not intended to serve as a substitute for legal advice on a specific matter. In the absence of such advice no responsibility is accepted by Brookfields for reliance on any of the information provided in this publication.

 

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