High Court rejects concept of partial frustration of a commercial lease

Key Contacts: John O’Donoghue – Partner Brendan O’Connor – Senior Associate  |  Michael Cahill – Senior Associate

The recent High Court judgment by Meenan J. in the case of Kenneth Treacy v. Lee James Menswear Limited and James O’Regan [2022] IEHC 600 provides a valuable insight into how the Courts are continuing to deal with the effects of Covid-19 restrictions, particularly their impact on commercial leases.

Background

In this case, the plaintiff landlord, Kenneth Treacy (the ‘Plaintiff‘), owned a property at Oliver Plunkett Street, Cork (the ‘Premises‘). The Plaintiff leased the Premises to a limited liability company, Lee James Menswear Limited (the ‘First Defendant’), in 2007 at a yearly rental rate of €222,500. The second defendant, James O’Regan (the ‘Second Defendant’), was a director of the First Defendant and had guaranteed the performance of the lease.

This case centred on the fact that although the First Defendant was forced to close its retail Premises for the period between March 2020 to May 2021, rent and insurance premium payments continued to accrue under its lease. Although the First Defendant made a part payment during this period, the Plaintiff’s claim was that the sum of €257,224.09 had gone unpaid and was owing pursuant to the lease.

The defence

In seeking to resist the Plaintiff’s application for summary judgment, the defendants sought to rely on two provisions of the lease wherein the first defendant was:

    • not to engage in any activity in or on the demised premises which may result in: The landlord incurring liability or expense under any statutory provision”; and
    • not to use the demised premises — for any illegal — purpose —”.

The defendants submitted that the Covid-19 restrictions, which prevented them from using the Premises for retail purposes, amounted to a frustration of contract and relieving them of their obligation to pay rent under the lease.

Judgment and analysis

As an initial point the High Court did not entertain the criticisms made by the Second Defendant, in an affidavit sworn on behalf of both defendants, “concerning the level of rent against the background of a significant downturn in economic conditions” – Meenan J. stated that these arguments did “not amount to a defence at law” and noted that the lease “was a commercial arrangement entered into freely by both parties”.

The substantive question for the Court to consider was whether the lease had been frustrated in light of the Covid-19 regulations. The Court referenced a number of previous judgments on the concept of frustration of contract.

In Ringsend Property Ltd v. Donatex Ltd and Bernard McNamara [2009] IEHC 56 (the ‘Donatex Case‘) it was stated that the defence of frustration is “one of limited application and narrowness” and “arises in circumstances where performance of a contract in a manner envisaged by the parties is rendered impossible because of some supervening event not within the contemplation of the parties”.

In the present case, the First Defendant sought to argue that the effect of the Covid-19 regulations was such that it was prevented from trading from the premises as it had done prior to the Covid-19 regulations. The Court noted however that the restrictions complained of were temporary in nature and could be said to amount to a “partial frustration”.

In considering this concept, the Court again referred to the judgment in the Donatex Case, where it was noted that the leading UK contract law textbook (Treitel on the Law of Contract) stated that:

…the contract is either frustrated or remains in force. There is no such concept as partial or temporary discharge frustration on account of partial or temporary impossibility…the concept of partial discharge in English law is restricted to obligations which are severable, whether in point of time or otherwise”.

The Court also considered the decision in Foot Locker Retail Ireland Limited vs Percy Nominees Limited [2021] IEHC 749. The facts of that case were very similar to the present case – there a retailer (Foot Locker) was unable to operate its premises as a retail outlet due to the restrictions introduced by the Covid-19 regulations and so it sought a declaration that the lease was frustrated and it had no liability for rental payments due from the date of the Covid-19 regulations coming into force. However, the High Court (O’Moore J.) found that:

“…Foot Locker has not established that there has been any partial discharge of severable obligations. The obligation to pay rent, the basic requirement placed on the tenant by any lease, is not a severable obligation. Relieving the tenant of this obligation, while permitting it to occupy the premises to the exclusion of the landlord or any alternative tenant, is not what Kelly J. contemplated when referring to the concept of partial discharge…

…The Irish authorities, in a consistent and principled way, have decided that partial frustration is not a legal concept applied in these courts. They also establish that the doctrine of frustration, if successfully invoked, results in the termination of the relevant contract (or lease) …”.

The Court also referred to the judgment in Oysters Shuckers Ltd t/a Klaw v. Architecture Manufacture Support (EU) Ltd and Anor [2020] IEHC 527 where it was held that:

The obligation to pay rent is an integral and indeed fundamental part of the contract… the plaintiff cannot argue that the rent obligation is frustrated, while arguing that the lease itself remains valid.”

Finally, the Court noted that the defendants had sought to rely on the American case of LLC v. Caffè Nero Americas Inc (No. 2084 CV 01493-BLS 2 (Mass. Super. Ct 2021) – however the Court found that the specific legal provisions referred to in that case had “no application in this jurisdiction” and furthermore, a decisive differing factor in that case was that the tenant (Caffè Nero) wilfully handed back keys to the landlord. In the present case the First Defendant remained in the Premises (albeit unable to open) throughout the period of the Covid-19 regulations being in force.

The Court, in dismissing the First Defendant’s arguments, noted that “it may be argued that the doctrine of frustration is an evolving one” however the legal authorities were “overwhelmingly against” its defence and the contention that “it was discharged of its obligation to pay rent for so long as the Covid-19 regulations were in force has no basis in law”. The Court proceeded to grant judgment in favour of the Plaintiff in respect of the rental arrears and insurance premiums due against the First Defendant and Second Defendant (as guarantor of the lease).

Conclusion

This judgment provides a useful reminder that the concept of “partial frustration” does not exist in Irish law at present and that while the Covid-19 regulations had obviously a profound impact on commercial leases they did not amount to a frustration of contract.

 

For further information in relation to this article contact John O’ Donoghue, Brendan O’ Connor or Michael Cahill.

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