A claim through the doctrine of frustration remains, as ever, extremely frustrating to succeed in.
Introduction
The recent Court of Appeal judgment delivered by Barniville P. in the case of Foot Locker Retail Ireland Limited v. Percy Nominees Limited [2024] IECA 65 involves Foot Locker appealing against the 2021 High Court decision handed down by Mr. Justice O'Moore. This case analyses the doctrine of frustration for commercial landlords and tenants. It considers how the Irish courts continue to deal with the effect of the Covid-19 restrictions, specifically their effect on commercial leases.
Background
In this case, the plaintiff tenant, Foot Locker Retailer Ireland Limited (the 'Plaintiff'), leased a retail store on Grafton Street in Dublin (the 'Premises'). The Plaintiff leased the Premises from Percy Nominees Limited (the 'Defendant') for a term of 35 years from 20 March 1990 with the lease due to expire in March 2025. As of March 2020, the annual rent was €750,000.
The Plaintiff was forced to close its retail Premises for the period between March 2020 and May 2021, however rent as well as other sums allegedly due, including insurance and reinstatement with interest were amassing under its lease for which the Defendant was seeking payment. The Plaintiff failed to make any payments during this period under its obligations in its lease but continued to occupy the Premises. The Plaintiff argued "partial frustration", such that it was not obliged to pay rent during the closure periods. O'Moore J. in the High Court found that there was no concept of "partial frustration" or "temporary frustration" in Irish law and ultimately dismissed the Plaintiff's claim. The Plaintiff sought to challenge this decision in March 2024 before the Court of Appeal.
The Appeal
In appealing the decision of the High Court, the Plaintiff again argued that there was a frustration of its lease contract brought about by the Covid-19 regulations which, it argued, prevented it from using the Premises as a retail outlet. As a result of these restrictions, the Plaintiff maintained it was relieved of its obligation to pay rent and other amounts under the lease.
The Plaintiff argued that the High Court had failed to give proper weight to the "truly exceptional, unprecedented and wholly unanticipated nature of the impact" of the Covid-19 lockdown measures on the operation of commercial retail leases. Although the Plaintiff advanced a number of grounds of appeal, its case rested on two key points dealt with in turn below:
- An invitation for the courts to create "new law"; and
- Terms within the lease.
An invitation for the courts to create "new law"
In this case the Plaintiff asked that the Court of Appeal make "new law" by establishing the concept of "partial" or "temporary" frustration of a lease exists under Irish law. It was acknowledged that such a concept has not previously been recognised at common law. The introduction of such precedent would allow a tenant to be released from the obligation to pay rent during periods where the leased property cannot be operated due to external factors, such as the government restrictions due to a pandemic.
The Plaintiff referred to English authorities on frustration, in particular HR & S Sainsbury Limited v. Street [1972] 1 WLR 834 and John Lewis Properties plc v. Viscount Chelsea [1993] 2 EGLR 77 with the Barniville P. noting that:
"...several English authorities demonstrate temporary impossibility (in the context of a particular venture) can, in exceptional circumstances, excuse non-performance..."
A summary of the Plaintiff's argument is as follows:
"...that there is no reason, in principle, why a concept of temporary frustration should not be given legal recognition and that it would be consistent with the common law's varying rationales for the doctrines of frustration and the temporary suspension of obligations. It submits, therefore, that it should be possible for the Court to sanction the temporary suspension or discharge of obligations under a contract rather than the discharge of that contract, in its entirety, and that, in this case, there are compelling grounds to suspend its obligation to pay rent while the Covid-19 measures and regulations prevented or frustrated the very essence of the user contemplated by the lease.".
Terms within the lease
Another essential part of the Plaintiff's appeal was that it could not, by reason of the Covid-19 restrictions introduced by ministerial regulations, use the Premises as a "high quality retail shop", as provided for in Clause 3.19 of the lease or keep the Premises open "at all reasonable times during the usual business hours of the locality" for carrying on the Plaintiff's business, as permitted under Clause 3.19.2.
Judgment and analysis
The Defendant contested the Plaintiff's appeal and arguing that the Plaintiff's claim would require the Court to:
"...revisit and overturn decades of well-established precedent which is grounded on unimpeachable principle which would amount to a radical departure from established principle."
The Court of Appeal ultimately had two key issues to consider:
- An invitation for the courts to create "new law"; and
- If there is, has the Plaintiff established an entitlement to a declaration that the lease has been partially or temporarily frustrated?
The overarching issue in this appeal was whether supervening events, in the form of the Covid-19 regulations, changed the express allocation of risk by the parties to the lease to the degree that the lease is "partially" or "temporarily" frustrated (to the extent that such a concept exists in Irish law).
Barniville P. declared that:
"In the present appeal, Foot Locker understandably places heavy reliance on the statement of Lord Wilberforce in [National Carriers Limited v. Panalpina Limited [1981] A.C. 675], as endorsed by Blayney J. in [Neville & Sons Limited v. Guardian Builders Limited [1994] IESC 4, [1995] 1 ILRM 1], that the doctrine of frustration "is, and ought to be, flexible and capable of new applications"".
The Court held that such flexibility does not apply to the case at hand, particularly since it is a lease, and one of a lengthy nature whereby it must be assumed that the parties envisaged the possibility of circumstances changing over the term. Therefore, the Court held that the cases cited by the Plaintiff were distinguished as they did not involve clauses similar to those in the present lease.
Like O'Moore J in the High Court, Barniville P. referred to the cases of Ringsend Property Limited v. Donatex Limited & Bernard McNamara [2009] IEHC 565("Donatex") and Oysters Shuckers Limited t/a Klaw v. Architecture Manufacturer Support (EU) Limited [2020] IEHC 527 ("Oysters Shuckers"). In Donatex, Kelly J. had rejected the concept of "partial frustration" of a contract by reference to established case law and academic authority. Thereafter in Oysters Shuckers, Sanfey J. agreed with the conclusions in Donatex and held that a tenant under a lease could not argue that its obligation to pay rent was frustrated while, at the same time, arguing that the lease remained valid.
With respect to the two covenants in its lease relied on by the Plaintiff (the "user" and "keep open" covenants), the Court noted that those covenants impose obligations on the Plaintiff and do not confer rights or entitlements on it. They are intended to be for the benefit of the lessor, the Defendant, and not the lessee, the Plaintiff.
The Court held that the terms in the lease precluded the Plaintiff from using the premises for any purpose other than a "high quality retail shop". The lease also imposed an obligation on the Plaintiff to keep the premises open "at all reasonable times" and "during the usual business hours of the locality" but this could not be construed as imposing an obligation on the Plaintiff to open the store when it was not legally permitted to do so.
The Court noted that a number of the leases considered in the case law cited contained very similar covenants to the "user" and "keep open" covenants relied upon by the Plaintiff. The fact that those arguments had failed in those cases further undermined the Plaintiff's attempt to distinguish its appeal from previous case law.
Having heard the legal arguments of both the Plaintiff and Defendant, Barniville P. held that:
"...the [High Court] judge correctly identified and applied the applicable legal principles and reached the correct and appropriate conclusion, on the facts and on the law, that there is no basis for Foot Locker's claim of "partial" or "temporary" frustration of the lease in respect of the Grafton Street Store."
In concluding his analysis of the terms of the lease, Barniville P. stated:
"...[the covenant] provisions of the lease, when properly construed as conferring no legal rights or entitlements but imposing only obligations, provide no support for Foot Locker's contention that they represent the fundamental bargain between the parties which was frustrated, on a partial or temporary basis, during the period of the Covid-19 restrictions. The fundamental bargain between the parties was, in my view, the holding of the premises for the duration of the lease in return for the payment of rent "without any deductions".
Conclusion
It is clear from the Court of Appeal's judgment that the doctrine of frustration is based on reasonableness and fairness. It has a limited scope and the threshold of proof required to have a successful claim in frustration remains high in the Irish courts. A contract merely becoming more difficult to perform is not sufficient in a claim for frustration of contract. This judgment is a reminder to both landlords and tenants of the need to consider potential risks and change of circumstances over the lifetime of a lease.
Although government-imposed restrictions seem like a distant memory, their effects continue to be examined by the Irish Courts. The law in respect of the frustration of contract remains the same with the Court of Appeal reaffirming that the concept of "partial frustration" or "temporary frustration" does not exist as a matter of Irish law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.