No Contractual Frustration of Restaurant Lease Arising from Pandemic Restrictions
In Cao v ISPT Pty Ltd [2024] NSWCA 188 (8 August 2024), the New South Wales Court of Appeal addressed, and applied, the legal principles pertaining to termination of a contract for frustration, in that case concerning a lease. Kirk JA – with whom Meagher JA and Griffith AJA agreed – wrote:
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[2] This appeal concerns a claim that the contractual doctrine of frustration enables the guarantors of a tenant’s obligations under a commercial lease to avoid liability for amounts outstanding under the lease. The tenant, Beijing Roast Duck Sydney Pty Ltd (the Tenant), ran a large restaurant named “Quanjade” in the World Square Shopping Centre in the Sydney CBD. The centre is owned by the respondents, ISPT Pty Ltd and AWPF Management Pty Ltd. The appellants, Mr Howard Cao and Mr Yuan Zhao, executed the lease as guarantors of the Tenant’s obligations. The Tenant’s restaurant closed on 23 March 2020 when the first of a series of State COVID-19 public health orders came into effect. It never re-opened. The Tenant went into liquidation in May 2021. The respondents made a claim in the Supreme Court against the appellants for outstanding arrears of rent and other amounts owing under the lease. In response, the appellants argued that the lease was frustrated from 23 March 2020 onwards. The primary judge, Nixon J, rejected that argument and ordered the appellants to pay the respondents the sum of $4,231,033.06.
[3] The appellants raised three overlapping grounds of appeal:
(1) The primary judge erred in finding that on the facts of the case the lease the subject of the proceedings below (Lease) was not frustrated by the restrictions imposed by the Public Health (COVID-19 Places of Social Gathering) Order 2020 (NSW) under s 7 of the Public Health Act 2010 (NSW) that commenced on 23 March 2020, and the subsequent public health orders (Public Health Orders) made under that Act imposing restrictions from 26 March 2020 to 2 June 2021 (Lockdown Restrictions).
(2) The primary judge erred in failing to find that compliance with the Public Health Orders would have required a radical transformation in the business operated in the premises the subject of the Lease (Premises) by the tenant of the Premises (Tenant), or would have rendered the Tenant’s business unviable for the remainder of the term of the Lease, or any significant part of it.
(3) The primary judge erred in finding that the imposition of the Lockdown Restrictions did not have the result that special condition 4 of the Lease (under which the Tenant must open the Premises for business during specified hours) was incapable of performance, or that performance would have contravened the law, and that it did not lead to the Lease being frustrated.
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[23] The leading Australian judgment on the doctrine of frustration is that of Mason J in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 (see at 356–360), drawing upon the earlier analysis by Stephen J in Brisbane City Council v Group Projects Pty Ltd [1979] HCA 54; (1979) 145 CLR 143 at 159 –163 ; see also eg oOh! Media Roadside Pty Ltd (Formerly Power Panels Pty Ltd) v Diamond WheelsPty Ltd [2011] VSCA 116; (2011) 32 VR 255 at [63] –[70] ; Chinatex (Australia) Pty Ltd v Bindaree Beef Pty Ltd [2018] NSWCA 126 at [44] ; Woolworths Group Ltd v Gazcorp Pty Ltd [2022] NSWCA 19 at [211] –[221] .
[24] In summary, the doctrine arises where the contract in question has continued operation and some new circumstance arises in which it falls to be performed. Frustration applies if that circumstance renders the context of performance so different from what the parties had assumed as to render the contract a fundamentally or radically different thing from what had been contracted for. Any relevant assumption of the parties is to be found from what is contemplated in the contract as understood in the surrounding circumstances in which it was made. The change in the assumed context must be such as to take it outside those risks for which either party had assumed responsibility.
[25] Applying the test involves issues of degree, as Stephen J explained in Brisbane City Council (at 162–163):
How dramatic must be the impact of an allegedly frustrating event? To what degree or extent must such an event overturn expectations, or affect the foundation upon which the parties have contracted, or, again, how unjust and unreasonable a result must flow or how radically different from that originally undertaken must a contract become (to use the language of some of the various expositions), before it is to be regarded as frustrated? The cases provide little more than single instances of solutions to these questions. These differences of application of the doctrine of frustration … are, perhaps, inevitable in questions of degree arising when a broad principle must be applied to infinitely variable factual situations.
[26] Where a contract is frustrated it is taken automatically to be terminated from that time on. An issue can arise as to timing which has some relevance here. Latham CJ said that frustration “must be decided at the time when the relevant alleged event happens, that is, upon probabilities and not upon a certainty arrived at after the event”: Scanlan’s New Neon Ltd v Tooheys Ltd [1943] HCA 43; (1943) 67 CLR 169 at 184 . It has been observed that “in most case where frustration has successfully been established there has been a single catastrophic event such as the outbreak of war, requisition of a ship, death of a party, destruction of the subject-matter, change in the law or government action”: Jane Swanton, “Discharge of Contracts by Frustration” (1983) 57 ALJ 201 at 202 . Yet there can be “a frustrating event or series of events”: Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724 at 738 (Lord Diplock). And frustration may occur as a result of creeping or gradual change: note Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 723 (Lord Reid); Swanton at 202–203. Further, in some cases the significance and likely consequences of an event may be uncertain. The event or events might only become sufficiently certain or sufficiently severe to frustrate the contract at some point subsequent to the first occurrence.
[27] That is not to dispute Latham CJ’s statement that the issue is to be determined as at a particular point in time. Any frustration will be taken to crystallise at some particular point taking account of what was known to the parties at the time. However, subsequent events might throw some light on the reasonable probabilities at the time: Bank Line Ltd v Arthur Capel & Co [1919] AC 435 at 454 –455 ; National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 at 706 –707 . As it has been put in other areas of the law, such use of later evidence is “not to prove a hindsight, but to confirm a foresight”: Housing Commission (NSW) v Falconer [1981] 1 NSWLR 547 at 558 .
[28] The cases do not speak with one voice on whether the doctrine can apply to leases: note NC Seddon and RA Bigwood, Cheshire & Fifoot: Law of Contract (11th Austn edition, LexisNexis, 2017), [19.25]. The primary judge considered that the issue should be resolved on a case by case basis rather than applying a blanket rule, but did not need to express a firm conclusion on the matter (see at [90]). On appeal both parties were content to adopt the English view that the doctrine could apply but that cases in which it would do so would be very rare: Panalpina at 689, 697, 711 and 715. It is sufficient here to proceed on that understanding.
[29] A finding of frustration is not lightly made. The mere incidence of expense or delay or onerousness is not sufficient: Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547 [2007] 2 Lloyd’s Rep 517 at [111] . Nor are disappointed expectations: Davis at 715; Ross v IceTV [2010] NSWCA 272 at [78] . That is so in order that legitimate commercial expectations may be preserved and protected; imprudent commercial bargains cannot be aborted or modified merely because of an adverse change of circumstances: Lee Chee Wei v Tan Hor Peow Victor [2007] 3 SLR 537 [2007] SGCA 22 at [48] .
[30] It is worth mentioning a handful of cases which illustrate the point in ways pertinent to this matter. Scanlan’s New Neon concerned a series of contracts in which the plaintiff had “leased” neon signs to advertisers on a number of buildings in this State and in Victoria. The plaintiff had borne the significant cost of erecting the signs. The contracts were for a five year term with an option to renew, and were entered between September 1937 and January 1941. In December 1941 and January 1942, in the course of World War Two, the governments of Victoria and New South Wales (respectively) made orders preventing the display of external lights at day or night. The High Court rejected the argument that the contracts were frustrated when these orders were made. Relevant, overlapping factors included that: the contract could still be performed; the owners had leased the signs but had not guaranteed that they could be illuminated; the advertisers had obtained the benefit of the signs for substantial periods, and still obtained some benefit from the unilluminated signs during the daytime; the lessor had spent significant sums on erection of the signs; and there were always risks that illumination of the signs might be restricted by government action during war or peace, and in the circumstances the advertisers and not the lessor should be understood to have accepted that risk. Reinforcing that frustration is not readily found, Latham CJ said that “[p]rima facie a promisor takes the risk of an event happening which prevents him from performing his promise” (at 200). Williams J considered that the evidence established “at most a case of hardship and not of frustration” (at 231).
[31] In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 a warehouse was leased for a period of ten years, with the lessees covenanting not to use it otherwise than for the purpose of a warehouse without the lessors’ consent. Nearly five and a half years into the term the only road access to the warehouse was closed by government order because of a risk of collapse of a neighbouring building. It was initially expected that the closure would be for “well over a year”. By the time the matter was heard in the House of Lords it looked likely be to about 20 months. The warehouse was rendered useless for the lessees’ purposes without road access. The House of Lords held that these facts did not raise a triable issue of frustration. As Lord Wilberforce put it, the lessees’ business had been “severely dislocated” but “this does not approach the gravity of a frustrating event” (at 697). Four factors were relevant to the conclusion of the House of Lords, brought out most clearly in the speech of Lord Simon of Glaisdale, and also in that of Lord Wilberforce:
(1) The significance of the restriction on the stipulated use of the property (see at 693B, 697C, 702H, 706E). That militated in favour of a finding of frustration, as the leased property was rendered unusable for the agreed use of warehousing.
(2) The length of time of the disruption, considered in the context of the term of the lease (at 697–698, 707). Lord Simon explained (at 707):
Whenever the performance of a contract is interrupted by a supervening event, the initial judgment is quantitative — what relation does the likely period of interruption bear to the outstanding period for performance? But this must ultimately be translated into qualitative terms: in the light of the quantitative computation and of all other relevant factors (from which I would not entirely exclude executed performance) would outstanding performance in accordance with the literal terms of the contract differ so significantly from what the parties reasonably contemplated at the time of execution that it would be unjust to insist on compliance with those literal terms?
(3) Tied to these points, whether the lessees still held an interest of some value despite the supervening event. Lord Simon noted that the lessees “could, at the time when the road was closed, look forward to pristine enjoyment of the warehouse for about two thirds of the remaining currency of the lease” (at 707). He said further that “[j]udging by the drastic increase in rent under the rent review clause … it seems likely that the appellants’ occupation towards the end of the first quinquennium must have been on terms very favourable to them” (ibid). One of the reasons Lord Wilberforce gave for holding frustration could apply to leases was that even though a lease gave an estate in land, that was no answer “if that estate is unusable and unsaleable” (at 695).
(4) The allocation of risk implicit in the lease (at 695, 698, 707). Lord Simon noted that the lease expressly provided for fire risk, and the parties “can hardly have contemplated that the … fire risk was the only possible source of interruption of the business of the warehouse” (at 707).
[32] The relevance of a lessee retaining something of value is illustrated by London & Northern Estates Co v Schlesinger [1916] 1 KB 20 . A lessee of residential premises was Austrian and, as a designated “alien enemy”, was prohibited by a war-time order from residing within certain specified areas which included where the leased premises were situated. The lease was not frustrated because although he could not personally exercise a right of personal occupation he could sublet the premises.
[33] The issue of remaining value also arose in City of Subiaco v Heytesbury Properties Pty Ltd [2001] WASCA 140; (2001) 24 WAR 146 , to which the primary judge in this matter referred (at [95]–[96]). The facts of the matter are unusual even for a frustration case. Four 99 year leases were entered between 1930 and 1959. The leases limited the permitted use of the premises to manufacturing or associated activities. In the late 1980s Heytesbury acquired the leasehold interests by assignment. It did so for speculative purposes, foreseeing (correctly) a possible rezoning. It did not intend to carry out manufacturing activities. The planning instrument then changed to prohibit manufacturing in early 1993. Heytesbury’s development plans did not work out as it hoped, and it ended up selling the leasehold interests to a government redevelopment authority, achieved by deed to which the lessor was a party. In the leadup to that sale Heytesbury had vociferously dismissed any suggestion that its leasehold interests had come to an end because of a frustrating event. Having sold its leasehold interests for a significant sum, it then resisted the lessor’s claim for rent owing on several bases including that the leases had been frustrated by the change in planning restriction which prevented the core permitted use being carried out. Unsurprisingly, the Full Court of the Western Australian Supreme Court rejected that argument. The most important factor, relevantly, was a finding in effect that the lessee had still held a valuable interest despite the restriction imposed on use (see at [72] and [74]). The Court also held that even if there had been a frustrating event, Heytesbury’s subsequent conduct prevented it from asserting that the leases were frustrated (at [75]–[78]).
[34] In this matter, as addressed further below, the appellants submitted before the primary judge and on appeal that the effect of the public health orders “would have transformed the Tenant’s Up-Market Restaurant Business on the Premises to a radically different business”. The primary judge said of this argument:
[130]The Defendant’s approach involves shifting the “radical difference” test from the effect of the supervening events on the performance of the contractual obligations which the parties have undertaken, to the effect of those events on the business of one of the parties.
[35] The appellants’ response on appeal was that whilst the appropriate approach was to look to the effect on performance of the contractual obligations:
such approach of itself does not exclude the consideration of the transformation of the tenant’s business carried on in the premises by supervening events to a radically different business, for the purpose of determining whether the tenant’s contractual obligations had become incapable of being performed.
[36] The primary judge was correct to indicate that the test looks to the effect of the supervening event on performance of the contractual obligations and, it should be added, on enjoyment of the contractual rights. The focus is not per se on the consequences of supervening events on the business or fortunes of a contracting party. That events have turned out badly for that party does not mean that they are no longer bound by the contract. Conversely, the fact that the supervening events might have only limited, or even beneficial, effects on the business of a party does not establish that some particular contract is not frustrated by those events (some businesses benefit from catastrophes). Latham CJ made the former point in vivid terms in Scanlan’s New Neon (at 191):
When a man agrees to buy a pair of boots for himself, both parties expect that he will be able to wear them. If he has an accident, so that he can no longer wear boots, he nevertheless still has to pay for them. If a man buys or hires a motor car, both parties know that he expects to be able to drive it. The stoppage of the sale of petrol, which would make it impossible for him to drive it, does not excuse him from his obligation to pay the purchase money or the hire for the agreed period.
[37] In these examples, the distinction between the obligation itself and the utility of the agreement is evident. But that does not preclude any consideration of the effects on a business being carried out by the party. There are cases in which, despite the performance of the obligation or enjoyment of the right still strictly being possible, a change in circumstances has neutered the commercial purpose of that obligation to the point that the contract is frustrated. The commercial purpose of a business-related contract may be tied to the nature of the business carried out. The effects on the contractor’s business of the change in circumstance might throw light on how the context of performance was so different from what the parties had assumed as to render the contract a fundamentally or radically thing from what had been contracted for.
[38] An example of where contractual obligations could still largely be performed despite the supervening events, but where the commercial purpose had been entirely undermined, is Brisbane City Council, decided by the High Court in 1979. A local council and a developer contracted that the council would apply to a State Minister to have land owned by the developer rezoned for development, with the aim of subdivision, in return for the company undertaking to build roads and other facilities in the area. After the contract was made and the rezoning achieved, but prior to subdivision, the developer’s land was compulsorily acquired by the State government. The developer successfully argued that it was not bound to carry out the works. Stephen J, with whom Murphy J relevantly agreed, based this conclusion upon frustration. His Honour noted that it was “not a case in which performance of contractual obligations has either been rendered impossible or more onerous by the frustrating event”, as the bulk of the work to be done was to take place outside of the acquired land and “can still be performed with no greater difficulty or expense than before” (at 157). However, “the acquisition of the land … has wholly destroyed [the developer’s] purpose in undertaking any obligations at all” (at 158). The council, too, had limited interest in some of the works being done given the changed circumstances. The link between the proposed subdivision and the required works emerged from the terms of the contract in that case. But the result would likely have been the same even if that was not so.
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Allocation of such a risk under the lease
[55] Most importantly, the Lease expressly provided for the allocation of risk in a manner which included business interruption, as follows:
49. Tenant’s risk
The tenant’s property, the tenant’s use or occupation of the premises and the Centre and the conduct of or ability to use the premises for the purposes described in Item 13 are each at the tenant’s own risk. …
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[58] The very existence of the provisions in the 2010 Act under which the public health orders were made illustrates that Parliaments and governments were prepared to introduce such measures in response to the constant threat of infectious disease; see similarly Biosecurity Act 2015 (Cth), Ch 8 Pt 2. The possibility of such measures was a topic regularly addressed (albeit with variable success and specificity) in business interruption insurance policies prior to the COVID-19 pandemic, as was reflected in the range of test cases on such policies that followed that crisis: eg HDI Global Specialty SE v Wonkana No 3 Pty Ltd [2020] NSWCA 296; (2020) 104 NSWLR 634 ; Rockment Pty Ltd t/as Vanilla Lounge v AAI Ltd t/as Vero Insurance [2020] FCAFC 228; (2020) 282 FCR 561 ; Star Entertainment Group Ltd v Chubb Insurance Australia Ltd [2022] FCAFC 16; (2022) 400 ALR 25 ; LCA Marrickville Pty Ltd v Swiss International SE [2022] FCAFC 17; (2022) 290 FCR 435 .
[59] In any event, the Lease contemplated the possibility of government restrictions affecting the operation of the Tenant’s business, and such restrictions might be motivated by a wide range of concerns. There is no reason why cl 49, construed in context, should not be given effect according to its terms. The Tenant’s use of the Premises and its ability to use the premises for the purposes of carrying on the business of a restaurant (as described in Item 13) was “at the tenant’s own risk”. The type of business interruption caused by the public health restrictions was a risk allocated to the Tenant under the Lease. That risk allocation precludes the operation of the doctrine of frustration when that risk eventuated.
Not a radical or fundamental change in what contracted for in any event…
[60] The appellants argued below and on appeal that the initial public health order was the supervening event which frustrated the contract from 23 March 2020 onwards, albeit they also referred to the content of the orders that followed. The contents of the public health orders subsequent to 23 March 2020 are potentially relevant both because they may throw some practical light on the possibilities that were imminent as at that date, and in any event because a contract might become frustrated only at a certain stage of evolution of an ongoing event or series of events (see the explanation above at [26]–[27]). Although not put in terms, I am prepared to assume that the appellants meant to argue in the alternative that the Lease became frustrated at some point subsequent to the commencement of the initial order.
[61] The appellants submitted to this Court, as they had below, that compliance with the public health orders “would have transformed the Tenant’s Up-market Restaurant Business on the Premises to a radically different business”. It was said that compliance “would have required having existing partitioning and fixtures removed in order to open up the area for use by patrons, and would have required a replacement of all existing tables with tables that would cover an area of 4 square metres … per person … from 1 July 2020 to 17 December 2020”. Further, the appellants claimed:
Regardless of whether the 4 square meters or the 2 square meters area restrictions applied during the June 2020 — August 2021 Public Health COVID-19 Orders restrictions period, the number of 4-person tables that would have been accommodated in the Premises during that period is 16 tables, providing a total capacity of 64 customers. This would have been spread over the entire Premises, including the private function rooms for the high-end patrons, which would have been unusable for their purpose due to the 4 square meters area and the 2 square meters area restrictions.
[62] The appellants went on to develop the significance of these supposed restrictions. It was on this basis that they sought to argue that the public health effects requiring transforming the restaurant into a radically different business. In making these arguments the appellants simply did not address the reasons of the primary judge in rejecting their erroneous understanding of the public health orders. No error has been shown in his Honour’s analysis in this regard.
[63] As explained above (at [16]–[20]), there was no need to replace all existing tables with new tables of a certain size, nor to remove partitions. The position in the period from the commencement of the restrictions until the lease was terminated was that for ten weeks from 23 March 2020 to 1 June 2020 the restaurant could in substance only operate on a takeaway basis; then for another month it was limited to 100 customers (or 40% of its capacity); then from 1 July 2020 it could operate at 80% capacity, being 200 persons, with even that restriction being lifted after 12 February 2021. Thus for a period of two months and a week the Tenant’s restaurant was limited in substance to takeaway; for one month it was limited to 40% of dine-in capacity; and for the following seven months it could have operated at 80% of dining capacity, after which it was back to 100% capacity. The Lease was terminated in June 2021.
[64] The appellants’ submissions were directed to the effect of the public health orders on the conduct of the Tenant’s business. As addressed above (at [34]–[38]), the doctrine of frustration looks to the effect of the supervening event on performance and enjoyment of the contractual obligations, but this does not preclude consideration of the effects on a business being carried out by the party in question. It should also be noted that the appellants’ focus below and on appeal was on the public health orders and not on the pandemic, and its possible effects on consumer behaviour, more broadly.
[65] The following factors, beyond allocation of risk, are of particular relevance here (see the discussion above at [29]–[38]): the significance of the restrictions on the stipulated use of the property and the extent to which the contractual rights and duties could still be performed; the length of time of the disruption in the context of the length of the lease; and whether the lessee still held an interest of some value despite the frustrating event.
[66] As to the first, at no time was the restaurant prevented from operating altogether. As explained above with respect to ground 1, at all times the appellants could have complied with the requirement in the Lease to keep the business open during certain hours. That being said, the practical ability of the appellants to enjoy the commercial purpose of the Lease was undoubtedly disrupted. That leads to the second factor. As at 23 March 2020 the Lease still had two and a half years to run of its three year term. As at 1 July 2020, from when the restaurant could have operated at 80% of dine-in capacity, it had 2 years and three months to run. The ten week period in which it was in substance limited to takeaway sales was 6.4% of the term of the Lease. Taking account of the nature and length of the restrictions, it cannot be said that the public health orders rendered the context of performance of the Lease so different from what the parties had assumed as to render the contract a fundamentally or radically thing from what had been contracted for.
[67] Moreover, it is apparent that the Lease remained something of value, even if that value had been reduced. On this issue, no error has been shown in the following observations of the primary judge:
[112] Further, the Defendants have not established that the leasehold estate was unsaleable. Clause 30.4 of the Lease provided that the Plaintiffs “will consent to an assignment of this lease” provided that the Tenant is not in breach and has taken each of the steps set out in clause 30.4(a)-(f). There is no evidence that the Tenant ever considered or explored the possibility of assigning the lease, let alone that it was unable to do so. Nor was there any expert evidence from the Defendants that the leasehold estate was unsaleable in the period from April 2020 to June 2021, noting that it was the Defendants’ burden to establish this was the case insofar as it was put forward by them as the basis for contending frustration.
[113] In July 2020, the Defendants were negotiating with the Plaintiffs to reopen the restaurant, at a reduced rent. The terms proposed included, among other things, that the rent owed by the Tenant under the Lease be waived for the period that the restaurant had been closed (that is, from April 2020 to August 2020); that the restaurant reopen at the end of August 2020 under a new lease; and that the base rent under the new lease be set, for the period through to 31 December 2022, at 50% of the rent that had been payable under the Lease. The Plaintiffs did not accept these terms, requiring that 50% of the rent be paid for the period of the restaurant’s closure, and that the 50% reduction in the future rent only apply until March 2021, with the full rent payable thereafter. While no agreement was reached at that time, those negotiations provide some evidence that the leasehold estate remained valuable while restrictions were in place under the Public Health Orders which limited the numbers for dining on the Premises.
[68] The appellants made submissions about the effect of the public health restrictions on the revenue of the Tenant. These submissions were based on the appellants’ erroneous understanding of the public health orders in relation to the square metre rules, and in any event were based on assumptions as to customer expenditure not founded on evidence. Moreover, when the appellants were making an argument about the detrimental effect of governmental COVID-19 restrictions on the operation of the business, it was incumbent on them to also bring to account governmental benefits designed to ameliorate the effects of the pandemic on businesses. As the primary judge explained (at [147]–[158]), there were two government schemes of note in that regard.
[69] The first was the federal government’s JobKeeper scheme, which was introduced on 9 April 2020 with the aim of assisting businesses which had experienced a significant decline in turnover as a result of the pandemic: Fair Work Act 2009 (Cth), s 789GDA ; Coronavirus Economic Response Package (Payments and Benefits) Rules 2020 (Cth). The scheme was explained in Qantas Airways Ltd v Flight Attendants’ Association of Australia [2020] FCAFC 227; (2020) 282 FCR 243 . It operated by subsidising the wages of employees for eligible businesses. As the primary judge noted at [149], it seemed likely that the Tenant’s business would have been eligible for the subsidy. Yet the appellants made no attempt to address how the scheme might have ameliorated the economic difficulties they claimed the Tenant suffered.
[70] The second was a State scheme which introduced measures benefitting an “impacted lessee”: Retail and Other Commercial Lease (COVID-19) Regulation 2020 (NSW), Retail and Other Commercial Leases (COVID-19) Regulation (No 2) 2020 (NSW); and the Retail and Other Commercial Leases (COVID-19) Regulation (No 3) 2020 (NSW). Again, it appeared likely that the Tenant was eligible (see at [152]). Notably, the scheme provided that a relevant lessor “must, if requested, renegotiate in good faith the rent payable under, and other terms of, the commercial lease”, and do so having regard to the economic impacts of the pandemic. The primary judge explained:
[156] There is no evidence that the Tenant made any request under reg 7(2) for a reduction in rent, or as to why it did not do so. It simply stopped paying any rent under the Lease. The negotiations which occurred between the Plaintiffs and the Defendants in July 2020 were for a new lease, rather than a renegotiation of the terms of the existing Lease. However, it is significant that in those negotiations the Plaintiffs indicated that they were willing to accept a 50% reduction in the rent payable for the Premises for a twelve-month period from April 2020 through to March 2021, with the full rental recommencing post-March 2021. This evidence suggests that, if the Tenant had made a request to renegotiate rent, whether under the Retail and Other Commercial Lease (COVID-19) Regulation 2020 or otherwise, it would have been favourably received.
[71] Assessing frustration is a practical matter. It is not to be approached in a one-sided fashion, focusing just on restrictive measures enacted in response to the pandemic without also taking account of governmental measures introduced to aid businesses through the crisis. The appellants’ evidence simply did not establish that, as claimed in appeal ground 2, the public health orders “would have rendered the Tenant’s business unviable for the remainder of the term of the Lease, or any significant part of it”.
Conclusion
[72] There is no reason to doubt that the Tenant’s business was adversely affected by the pandemic. But the restrictions imposed by the public health orders did not put the Tenant in breach of the terms of the Lease. The Tenant accepted liability for that type of risk under the terms of the Lease. And, in any case, the appellants have not shown that the effects were such as meet the high threshold for establishing frustration. The appeal should be dismissed, with the appellants to pay the respondents’ costs.
(emphasis added)
The full decision may be found here.
