Can Fire Safety Frustrate a Commercial Lease? Into Nominee 1 v Study Group

Can a commercial lease come to an end because an unexpected event has destroyed its purpose?

In this episode of Unpacking the Case, Richard and Lizzie examine Into Nominee 1 Ltd v Study Group UK Ltd, a recent High Court decision that visits the contractual principle of frustration.

The case is the latest in a long line of attempts by tenants to argue that a lease has been frustrated by events outside their control. This time, the dispute arose against the backdrop of post-Grenfell fire safety concerns, with the tenant arguing that the common purpose of the lease had been undermined.

Richard explains why frustration rarely succeeds in the context of leases.

Whether you're a commercial property lawyer, surveyor, landlord or tenant, this episode explores why frustration remains one of the hardest to establish arguments in real estate law.

Relevant cases: 

Taylor v Caldwell (1863)

Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd (1945)

National Carriers Ltd v Panalpina (Northern) Ltd [1981]

Canary Wharf v European Medicines Agency [2019]

Bank of New York Mellon (International) Ltd v Cine-UK Ltd [2022]

Krell v Henry [1903]

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This podcast is for informational purposes only and is not intended to provide legal or professional advice. No liability is accepted by Davitt Jones Bould for any reliance placed on its content.

Transcript

00:00:01:04 - 00:00:26:10

Lizzie Collin

Hello and welcome back to Unpacking the Case. There has been a long line of cases where someone argues that a commercial lease has been frustrated. That means an unexpected event has changed things so dramatically that the lease should simply come to an end. It's an argument that captures plenty of attention, but it's one that almost never succeeds. This week, we're looking into nominee one limited and study Group UK limited.

00:00:26:12 - 00:00:53:11

Lizzie Collin

A recent High Court decision that revisits the doctrine of frustration in the context of commercial property. Frustration is a familiar concept in contract law, but leases have always been treated rather differently. The courts are reluctant to allow parties to walk away from long term property interests, simply because the circumstances have changed. In this episode, we'll explore what the decision tells us about the very limited circumstances in which a commercial lease might ever be frustrated.

00:00:53:12 - 00:01:02:12

Lizzie Collin

Let's unpack the case.

00:01:02:14 - 00:01:27:07

Lizzie Collin and Richard Snape

Hi, Richard. Hello, Lizzy. Hello. We're here to talk about a case. As per usual, that is what we usually convene to do. Yeah, and this time it's a case from the High Court from the 21st of May called into nominee one limited and Study Group UK limited. And it's the latest in a long line of cases arguing that leases have become frustrated by some intervening act.

00:01:27:09 - 00:01:52:11

Richard Snape

And it also brings in some post Grenfell legislation on fire safety matters. So do you want to give us background facts for this one please. Yeah I'll sort of I say there are arguing frustration of the common purpose. And if you remember your studies frustration. It's a contractual principle. But crops creeps into a sort of lease on occasion.

00:01:52:14 - 00:02:22:04

Richard Snape

It's where there's an unforeseen intervening event which renders substantial performance of the contract impossible. And if it's frustration of the common venture, it's basically physically the activity is still possible, but it makes no commercial sense. The commercial reality has disappeared because of someone foreseen event, and it's got to be for the common purpose. It was a summary judgment, but the background facts, it all took place in Brighton.

00:02:22:04 - 00:03:00:10

Richard Snape

Study Group UK have quite a few of these places up and down the country, where it's sort of residential training school. It was a new build property and they entered into this lease. There was an agreement for lease and then a lease for 25 years into in 2007, it was in Brighton. And the basic idea is that they they take overseas students and, you know, sort of give them foundation basis and like so they can then apply for universities and this kind of thing and the, the premises and say it was a residential training college.

00:03:00:10 - 00:03:31:00

Richard Snape

It seems to comprise two separate buildings and a glazed corridor between the two. One was the kind of academic part where the training would occur and the other was residential, which is where the problems arise. So they had this 25 year lease in 2021 post Grenfell. It wasn't what it was a a higher risk building, but it was over 11m in height and post Grenfell in 2017.

00:03:31:01 - 00:04:03:04

Richard Snape

A few years later, they checked the property in relation to fire safety and the likes, and found out there were severe fire safety problems and the external cladding. So often the case, but also cavity barriers, which, you know, guitar defects hadn't been installed and experts also said it breached then Building Regulations 2007. Building Roads and Bridges 2007. Building regs massively breaches them today.

00:04:03:06 - 00:04:28:04

Richard Snape

But they again the sort of experts, you know, that's going to have to be a medial work. And they said that the remedial work probably wouldn't be completed until after the lease had come to an end in 2032. And so they basically refused to pay the rent and argued the contracts had been frustrated. And that's some of the background to it.

00:04:28:06 - 00:04:51:19

Richard Snape

There's there been any previous case law on this? There's been loads of cases, but I'll give you the one. I mean, the first I think, case of frustration of contracts was not dissimilar. It was 1863, Taylor and Caldwell, which was about a theater hired out for various performances and the theater down before the performances. And that was frustrating.

00:04:51:19 - 00:05:24:15

Richard Snape

But in the also, I mean, in terms of sort of leasehold premises, there was a case in 1945 House of Lords case called Cricklewood Investment Trust in Leighton Investment Trust, which what had happened is before the years before the Second World War, sometime in the 1930s, late 30s, the they entered into a 99 year lease whereby they would build shops on this particular premises.

00:05:24:16 - 00:05:54:01

Richard Snape

And what then happened in charge of internal lights. But what then happened is the Second World War intervened because of wartime regulations. You couldn't build those massive limitations on building sort of civil premises, so they couldn't build the shops. And they argued the contract had been frustrated and least had been frustrated. The House of Lords, as they were unanimously said on the facts, there's no frustration, you know, they didn't know how long the war was going to last.

00:05:54:01 - 00:06:19:02

Richard Snape

It was towards the end of the war. The case was was heard, but it wouldn't be lasting for anywhere close to 99 years, and therefore it was only a small fraction of the whole, if you like, which would be affected. Two of the judges actually said that frustration couldn't apply to leases because you lease out the land, and even if the building disappears, then you can't build the building.

00:06:19:02 - 00:06:49:15

Richard Snape

You've still got the land. Two of them said you could potentially, but rarely have, frustration of contracts if their lease olds and the other judge decided not to say anything, then we had another case in 1981, National Carriers and Panel Piner, which was a ten year lease of a warehouse in Hull. Another House of Lords case where for 20 months, after five years, for 20 months, the council decided to shut down the access road to the warehouse, rendering it worthless.

00:06:49:17 - 00:07:13:02

Richard Snape

It was 20 months anyway because there was a neighboring building and danger of collapse. And again, the House of Lords decided that there's a possibility of frustration, but not in the event, you know, not on the facts here. It's only 20 months out of ten years. And we had another case, a High Court case, which was settled before it went to the Court of Appeal 2019.

00:07:13:04 - 00:07:41:07

Richard Snape

Do you remember a case? I think we talked about? It wasn't one of the podcast. It was before we started doing the podcast, a case called the Canary Wharf and the European Medicines Agency. 

Lizzie Collin

I can't remember that far back. Richard. We've been doing these podcasts so long. That must be right. Well, it was it was a 23 storey building in Canary Wharf and the European Medicines Agency, or a body leased out ten stories on a 25 year lease.

00:07:41:07 - 00:08:09:14

Richard Snape

There was an agreement for lease in August of 2011. And then there was the actual Lisa was in 2014 paying something like 30 million pounds per annum. And when almost exactly ten years ago, the Brexit vote occurred and we subsequently left Europe, they basically couldn't operate in a non-EU country. So they argued it would be a frustrating event.

00:08:09:15 - 00:08:39:15

Richard Snape

Brexit. It would be a breach of statute and a breach of our constitution to continue it. Could a bankrupt Canary Wharf if it had been decided in their favor? The judge actually said in 2011 Brexit was none foreseen. Intervene in event. I doubt that actually it was being talked about in 2011, but they decided it didn't render substantial performance impossible because you could still.

00:08:39:17 - 00:09:10:03

Richard Snape

You could assign the lease assignment. I think it was subject to somebody with equal standing and equal credit worthiness or sublet to somebody. And so they eventually sublet to, to rework. So it was all settled. But again, frustrating frustration would probably bring the lease to an end early in your liability, but not here. And the case we did do a podcast on I remember and of local interest to yourself was Bank of New York Mellon.

00:09:10:03 - 00:09:20:11

Richard Snape

And do you remember that one you, which was a cinema complex in Whitchurch in south Bristol?

00:09:20:13 - 00:09:56:01

Richard Snape

In the early days of lockdown, the way they tried, amongst other things, to argue in the High Court that the lockdowns and Covid, because the cinema couldn't obviously open, gave rise to a frustration of frustrating the event. There's a lot of discussion about it during the lockdowns, but they failed again. The lockdowns weren't going to last forever. Although it felt like it an occasion and it'll only a small amount of the the time that we'd have to shut, you know, the duration I think was a 35 year lease.

00:09:56:03 - 00:10:24:06

Richard Snape

And when it went to the Court of Appeal, they didn't even bother arguing the frustration. There's actually only been one case, and that's a strange one. Crellin, Henry, 1903. When the coronation of Edward the Seventh was canceled because he was ill with peritonitis, and somebody had leased out a flat to watch the coronation for two days in June of 2019, oh two, 22.

00:10:24:08 - 00:10:46:03

Richard Snape

And they decided that was a frustration event. But that was the whole of the time that, you know, the duration of your agreement and it sort of that's about the only thing that's come close to succeeding. So that's what they try to argue. And would you like to know the decision always. Yes, please. You can probably guess the decision on the basis of what I've said previously.

00:10:46:08 - 00:11:14:10

Richard Snape

In fact, it was a summary judgment. Probably not. A full court hearing probably tells you something. The judge decided that, well, basically they then toured into initially in the lease, a very onerous repairing obligation, and the tenants had an unlimited obligation to renew or replace, you know, rebuild, reconstruct, renewal, replace the whole of the building.

00:11:14:12 - 00:11:36:01

Richard Snape

Unless, well, basically a very, very onus repairing obligation, which suggests that they took on the risk. They also had entered into an agreement for lease. And the agreement said that anytime during the agreement for lease, the landlords would be the ones who were potentially liable for defects in the building work. But it was expected that didn't seem to happen.

00:11:36:01 - 00:12:04:15

Richard Snape

But it was expected that when the lease actually was granted, they would be the ones they would have to enter into collateral warranties with the deeds of warranty with the the developers, the builders to have a direct obligation. But so the tenants had agreed that they lease didn't or excluded any warranty, that the property was suitable for its lieutenant's purpose.

00:12:04:20 - 00:12:30:09

Richard Snape

And basically the tenants said, you know, the parties had allocated the rest of the tenants and the defects were foreseeable risks which the, you know, went on foreseeable. And for all those reasons, the fact that it was foreseeable and the risks had been passed clearly to the tenant and owner's repairing obligations and so on. It was not a frustration event, as you mentioned at the beginning.

00:12:30:10 - 00:12:59:17

Richard Snape

They also tried to argue that since the lease had been entered into, there had been some post Grenfell legislation, 2021 Fire Safety Act into force in England in May of 2022 and basically says that your obligations enhanced if there's residential properties, you have to have a fire safety risk assessment with in relation to any internal doors which open into the common parts and any external doors and windows.

00:12:59:17 - 00:13:34:14

Richard Snape

And the Building Safety Act came into force in June 28th, 2022. And that's people with an interest in the property and local authorities and likes going to require remediation orders to remedy sort of fire safety risks and structural safety risk. And the court decided that's a nonstarter because you had the obligations anyway before the legislation all changed. So yet another case where frustration of contract is possible, a lease is possible, but not on the facts.

00:13:34:16 - 00:13:57:13

Lizzie Collin and Richard Snape

So do you want to conclude by telling us why this is important? I think it's yeah, another sort of it was you know, it was a hefty claim. I know they had to pay about nine, just over 9 million pounds, 9.03 million pounds in rent. Well, it's yet another desperate attempt to argue that leases can be frustrated and there's a possibility they can.

00:13:57:14 - 00:14:20:21

Richard Snape

I remember when discussing it during the lockdowns and heaven forbid if we have that again. But, you know, if the lockdowns lasted, I don't know, off and on for a year and a half that then if the lease is only for a year and a half, you might just have a possibility of claiming frustration, but not, you know, it's going to be exceptionally rare.

00:14:20:23 - 00:14:29:14

Lizzie Collin

I didn't think it had a chance of success. And there we are. Thank you very much, Richard. Thanks a lot, Lizzie. There we go.