Lease frustration in commercial agreements

3 minute read  02.10.2023 Amy Southwell, Steven Reece

In the recent NSW Supreme Court decision of ISPT Pty Ltd and AWPF Management No. 2 Pty Ltd v Cao and Zhao [2023] NSWSC 1115, his Honour Justice Nixon, has had the opportunity to consider whether a lease agreement can be frustrated.

Whilst the Court has indicated that it will be "exceedingly rare", there is no binding precedent on the Court to suggest that the doctrine of frustration is incapable of applying to a lease and the issue needs to be approached on a case-by-case basis. Frustration can occur if a leasehold estate is rendered both unusable and unsaleable. The Court observed at [166], in terms of the commercial allocation of risk, that:

"There will likely be significant obstacles to establishing any such defence [establishing frustration of a lease] where the parties have entered a commercial lease, for a number of years, with terms dealing with the allocation of risk in the event that the premises cannot be used for their intended purposes, and with an obligation to rent that is expressed in absolute terms."

We await a test case before the High Court to finally, and more determinately, resolve the question.

The central facts were:

  • In early 2020, ISPT Pty Ltd and AWPF Management No. 2 Pty Ltd (Landlord) leased shops 10.41 and 11.05 in the World Square Shopping Centre (Premises) to Beijing Roast Duck Sydney Pty Ltd (Tenant) for a term of three years, with a commencement date of 1 October 2019 and an expiry date of 30 September 2022, with an option to renew for a further 3 year term (Lease). The Lease was a commercial lease by reason of the Premises being 1,092.4 square metres in area.
  • After the first lockdown commenced in New South Wales in response to the COVID-19 pandemic, and after the issue of the Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW) dated 23 March 2020, the Tenant was in significant arrears in payment of rent, having failed to pay the rent due, over the period January to March 2020.
  • The Tenant closed the restaurant on 23 March 2020, and chose not to open the restaurant for takeaway business at any time after that, despite being permitted to trade as a takeaway business under the COVID-19 lockdown restrictions during the pandemic period.
  • The Landlord brought a claim for unpaid rent and sought damages from the Tenant for breach of Lease.

Was the Lease frustrated by virtue of the COVID-19 lockdown restrictions?

The NSW Supreme Court was asked to consider whether the Lease was frustrated by virtue of the COVID-19 lockdown restrictions imposed on the Tenant's business.

Decision - the Lease had not been frustrated

The Court found in favour of the Landlord, concluding that, among other things, the Lease had not been frustrated, in the circumstances, because:

  • There is no binding precedent on the Court to suggest that the doctrine of frustration is incapable of applying to a lease, rather, the issue is to be approached on a case-by-case basis based on the unique factual circumstances;
  • Frustration, in the context of considering whether a leasehold estate is rendered unusable and unsaleable by supervening events, can only occur if a leasehold estate is rendered both unusable and unsaleable;
  • The Tenant's leasehold estate had not been rendered 'unusable and unsaleable' by a supervening event, namely the COVID-19 lockdown restrictions imposed on the business;
  • The "radically different" test looks to whether a contractual obligation has become incapable of being performed because the circumstances in which the performance is called for, would render it radically different to what the contract provides for and contemplates;
  • The Court determined that the evidence did not establish that compliance with the Public Health Orders would have required a radical transformation in the Tenant’s business or would have rendered the Tenant’s business unviable for the remainder of the Lease term, or any significant part of it;
  • The Landlord was entitled to recover unpaid rent and loss suffered due to the Tenant's breach of the Lease; and
  • The Tenant was not obliged to make good the Premises by removing the fitout.

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