COVID-19: No Room for Partial Frustration as Commercial Lease Terms Hold

Foot Locker, the plaintiff in the case, occupied 44 Grafton Street and traded from the premises as a retail store under a lease from Percy Nominees Limited, its landlord. When the parties failed to reach agreement on rent arrears that had accrued following the on-set of the COVID-19 pandemic Foot Locker issued proceedings seeking a declaration that the lease for the premises was frustrated, and that it had no liability for rental payments under the lease as and from 24 March 2020 when it was forced by law to close its store.

Foot Locker initially argued that the lease was “entirely frustrated”, which would have brought the lease to an end but during the course of the proceedings, and at the hearing, amended its claim to one of partial frustration. In seeking to establish a partial frustration, Foot Locker was advancing an argument that it should be free from any obligation to pay rent under its lease at 44 Grafton Street for the period of the COVID-19 closures but should otherwise be entitled to continue to occupy the premises under the lease.

In making the argument, Foot Locker accepted that there is no Irish authority supporting the concept of partial frustration of a lease (or of a contract) but sought to distinguish its case from the Irish authorities, Oysters Shuckers Ltd v Architecture Manufacture Support (EU)¹ and Ringsend Property Ltd. v. Donatex Ltd. & Anor² on the basis of the specific user clause and keep open clause contained in its lease. It argued that the combination of these clauses “mandates” the tenant to operate a high end retail store during normal trading hours, which it could not do during the COVID-19 restrictions.

O’Moore J. did not accept the arguments advanced by Foot Locker. In response to the submissions in respect of the keep open and user covenants in the lease, O’Moore J. held that the obligation to keep the store open was one which was conditioned in the lease by reference to normal trading hours and reasonable times. Fundamentally, however, he found the argument to be “unsupportable at the level of principle”. The concept of partial frustration, where a party would be freed from its liabilities on one hand, but continue to benefit on the other, was described by O’Moore J. in his judgment as doing “violence to the fundamentals of the doctrine” of frustration and would see the doctrine “torn from its moorings”.

The court also restated the decision in Oysters Shuckers (see our earlier briefing on that case here), which held that the obligation to pay rent is an integral and fundamental part of a contract and, while it may be suspended in circumstances provided for in a lease, the court would not imply such terms into a lease. O’Moore J. stated that while a pandemic may not have been envisaged when the lease was drafted, the lease was granted at a time when the possibility of closure connected with violence in Northern Ireland would have been contemplated and yet the lease made no provision for the suspension of rent in such circumstances, while doing so for circumstances where the premises were destroyed or damaged.

Foot Locker’s  claim was dismissed and the matter was listed for mention for the purpose of dealing with the counterclaim for the balance of the outstanding rent due since March 2020, insurance premia unpaid since that time and interest. The Court granted judgment for the outstanding rent of just over €1m to the landlord, and awarded costs to the landlord which included the costs of the counterclaim.

Conclusion

Both landlords and tenants of commercial property will take guidance from this decision. It reaffirms that a doctrine of partial frustration is not one which is applied by Irish courts, and that the concept of a lease which is frustrated but which continues in existence is inconsistent with the foundations of the doctrine of frustration as it has originated and evolved.

It also reaffirms that the terms of the lease are paramount in terms of the rights and obligations of the parties with regard to rent suspension.

Also contributed by Aoife Cox.