The legal “must knows” – Covid 19 impact on contract and lease obligations

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With all the information flying around right now about legal obligations I hope to provide this succinct summary of the key legal issues that arise and impact contract and lease obligations in the light of Covid-19.

Force Majeure clauses – what are they?

Many contracts of all types contain Force Majeure clauses. In general, these are clauses which will or may enable either or both parties to avoid any ongoing contractual performance for the duration of a defined force majeure event, or in some cases the balance of the contract.

It is important to read the clause carefully to see whether the clause applies to a Covid 19 scenario. Some expressly apply in the case of a “pandemic”, others apply where there is a “government restriction”. Such forms of clause which contain this wording will apply to Covid 19, but your lawyer needs to read your clause and confirm this with you. A Force Majeure clause in a franchise agreement may for instance mean that fees (where fees are paid on a flat fee basis) cannot be collected from franchisees at this time. I mention this specifically because I have been hearing stories this week of franchisees unable to work but being required to continue to pay fees.

It is important to note that the clause won’t always use the words “force majeure”, so the agreement needs to be fully reviewed to see whether the essence of the clause is buried somewhere in the fine print.  For instance, the clause may sometimes contain references to “impossibility of performance” or “frustration of the agreement”. In reading the agreement, don’t skip through the headings, look through the detail.

Whether the parties are fully released from all ongoing obligations or just for the duration of the relevant “Force Majeure” event is also something that should be expressly stated in the clause and may differ from case to case.

What about leases?

Leases need a special mention here because the ADLS standard form lease (edition 6) contains a clause headed “No Access in Emergency” and it appears as clause 27.5. Check to see if this clause appears in your lease. In a way, this is a form of Force Majeure clause. The clause reads as follows:

“No Access in Emergency

27.5       If there is an emergency and the Tenant is unable to gain access 

to the premises to fully conduct theTenant’s business from the premises because of reasons of safety of the public or property or the need to

prevent reduce or overcome any hazard, harm or loss that may be associated with the emergency including:

(a)  A prohibited or restricted access cordon applying to the premises.

(b) Prohibition on the use of the premises pending the completion of structural engineering or other reports and appropriate certifications required by any competent authority that the premises are fit for use.

(c) Restriction on occupation of the premises by any competent authority.

Then a fair proportion of the rent and outgoings shall cease to be payable for the period commencing on the date when the Tenant became unable to gain access to the premises to fully conduct the Tenant’s business from the premises until the inability ceases.”

If you are a tenant, you will be wondering how this clause will apply to alleviate your rent burden. Also, your lease may not include this clause word for word, but it may have a similar clause. Each case will be different so read your lease thoroughly to see if it or something similar is included. That said, many of the larger professional landlords have done away with that clause entirely. If you are a franchisor who has leased premises which you sublease or sublicense to franchisees, you might want to check to see whether there are similar obligations in your sublicense or sublease.

If you have clause 27.5 in your lease, or something similar, this clause is now triggered because there is a restriction on occupation by a competent authority (assuming you are not an essential service). This means a “fair proportion” of rent and outgoings will cease to be payable.

Determining what is a “fair proportion” of rent and outgoings will depend on multiple factors including the nature of the premises and the business being conducted from within those premises. In the first instance, the parties should be in communication and there should be a negotiation around what is a “fair” proportion. The question of what is “fair” should be decided on reasonable and objective considerations, not what one or the other party subjectively believes is fair.

What if there is no force majeure clause in my contract or lease?

If there is no Force Majeure clause, then the legal doctrine of Frustration may apply.

This is a legal doctrine that applies to all contracts and there are a number of important parts to it. What follows is a summary of some key elements, but as always, every situation is different so please seek legal advice before taking any steps such as not honouring agreements as this could have very negative consequences if the doctrine is later found to not apply.

Quick summary of the Doctrine of Frustration

Key points are as follows:

a) Frustration occurs where, without fault of either party, a contractual obligation has become incapable of being performed (because there has been some significant change of circumstances) and which so significantly changes the nature of the outstanding contractual rights and obligations from what the parties reasonably envisaged at the outset that it would be unjust to hold them to the contract.

b) The threshold for establishing legal frustration of contract is very high. Where it applies, both parties are discharged from the contract completely. The contract comes to an end.

c) The doctrine of frustration does not apply where the contract itself provides for what will happen in the event of this new situation occurring. Hence, where there is a Force Majeure clause or clause to similar effect, such as clause 27.5, the doctrine may not apply.

d) In the case of leases, lawyers will need to carefully think through whether the interruption in expected use of the premises will qualify as a frustrating event where the interruption does not last for a lengthy period of time. There is case law where this issue has been considered. Factors such as the length of the unexpired portion of the term and whether there is any room for partial “frustration” to apply will need to be carefully considered.

e) Cases where courts have dealt with frustration of contract have made it clear that there are multiple factors to look at and consider and so every situation is going to be different and have a different answer. This will not make the jobs of lawyers advising in this area any easier!

It will be tempting to grasp at the doctrine of frustration as a pathway to alleviating contractual performance but take proper legal advice before acting because if the doctrine does not apply, a contracting party who does not honour their contractual obligations will risk considerable legal consequences.

Stay safe everyone!

This article is not a substitute for legal advice about your own individual situation. Every case can be different so please seek legal advice or contact me direct for advice that applies to you.