What is the Doctrine of Frustration?
And how does it apply to leases?
Who should read this article?
Any party who has entered into a commercial property lease, who could be:
- affected by unforeseen circumstances relating to the property’s continued use
- facing a legal challenge over the lease’s ongoing validity.
Why is this important?
Circumstances outside of your control happen, and these can impact the lease of your property or premises. It is vitally important to consider all future possibilities when negotiating a property lease. Doing so could save significant stress and funds.
What is the Doctrine of Frustration?
This is a common law doctrine that has developed through cases in the courts.
The doctrine of frustration applies in circumstances where a supervening event makes further performance of a contract impossible (practically or legally) or where the event is so fundamental it destroys the basis of the agreement.
Its effect is to automatically bring the contract to an end, relieving the parties of having to perform their obligations any further.
A frustrating event requires:
- a radical change in circumstances compared to what the parties contemplated at the time of contracting;
- impossibility or illegality of performance of a contract ;
- that neither party is at fault.
The consequences of frustration are set out in the Contract and Commercial Law Act 2017.
Leases
Historically the doctrine did not apply to leases in New Zealand. However, in recent years, including in response to the Christchurch earthquakes, the courts have applied the doctrine to leases too. However…
The doctrine of frustration applied to leases is rare
It’s not impossible to challenge the continued existence of a lease based on this doctrine, but the circumstances it applies will be rare.
Terms of the lease will also be relevant, including:
- The remaining term of the lease;
- The ability and necessary time for the premises or land to be used or returned to use for any purpose permitted under the lease;
- The potential for alternative uses as authorised by the lease;
- The existence or otherwise of terms dealing with supervening events.
Whether a lease is frustrated or not will be determined by the facts of each case and the existing body of case law on the doctrine.
What about force majeure?
A force majeure clause allows suspension of a contract on occurrence of a supervening event which is not the fault of either party. Every force majeure clause is drafted differently.
In addition, clauses in a lease may provide for the ability to terminate a lease in certain circumstances.
Terms of the lease which deal with “acts of God”, force majeure or other similar events such as flooding, earthquakes, fire, tempest, erosion, evulsion and the like are relevant. A party may have the right to suspend or terminate the lease without having to rely on the doctrine of frustration.
Real life example
The doctrine was first recognised in the English case in 1863 of Taylor v Caldwell. The parties had an agreement to rent out a music hall for concerts. The hall burnt down before the first concert took place. No concerts could occur. The court held the contract was frustrated because performance had become impossible. The parties were each discharged from their obligations to the other.
The courts have been cautious in applying the doctrine of frustration
The courts are careful not to allow a contract or lease that has been entered into freely, to be easily overturned as soon as problems arise. Therefore, the threshold for frustration is set very high.
Frustration should not be claimed lightly. A wrongful claim could be a breach of contract in itself and could lead to an award of damages to the other party or to an order that all or part of the contract has to be performed.
If in doubt, reach out
The best advice is to discuss any property lease contracts with your lawyer. Our Property law team at Carlile Dowling would be pleased to assist you. Connect with us by calling 06 561 0837 or emailing Teresa Mee at teresa@cardow.co.nz.
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