Stop the rent: is building safety capable of rendering a lease frustrated?

The Claimant was the freehold owner and landlord of a premises in Brighton known as Voyager House (“the Premises”). The first Defendant (“SGUK”) was an education provider tenant. The Premises is a purpose-built residential school. A full repairing and insuring lease had been made in 2007 for a period of 25 years. The issue was that the Premises could not be used due to fire cladding safety defects affecting the building that the Premises was located in. An Agreement for Lease had also been entered into in 2004.

The Claimant made an application to court for summary judgment in a dispute of unpaid rent exceeding £9 million plus interest. The summary judgment application was ultimately successful.

Audit in 2021

SGUK had conducted a post-Grenfell audit in 2021, and had become concerned about the construction of external walls. A third-party consultancy was instructed the following year to undertake an intrusive survey to identify the materials and components used within each of the external wall cladding systems. Serious fire safety defects had been identified.

Vacation of premises

In 2022, SGUK wound down operations and students vacated the Premises in July 2022 with staff contracts being terminated in August 2022. Due to the period of time it would take for works to be carried out and the time it would take to establish the education provider’s institution again,

SGUK had sought to argue that the lease had been frustrated because of the cladding safety defects.

What is summary judgment?

The court can grant a summary judgment, without a full trial if it believes that the defendant has no real prospect of defending the claim. The defence must be realistic and not ‘fanciful.’

What is frustration of contract and does it apply to leases?

Frustration occurs when it is not possible to perform the obligations of a contract without default on either side. The effect of frustration is that both parties would be discharged from their obligations in relation to the lease.  

Sighting a case decided by the House of Lords, the court decided that frustration can apply to leases but noted that the doctrine of frustration has never been successfully invoked regarding a lease. There had previously been two cases and neither was successful.

Frustration by reason of changes of legislation

SGUK had sought to argue that changes of legislation requiring remediation of dangerous buildings following the Grenfell Tower fire meant that the building was not compliant with legislation.

The relevant legislation was the Fire Act 2021, which came into force in May 2022. In June 2022, Part 5 of the Building Safety Act (BSA) came into force. Part 5 meant that interested persons, could seek a remediation order against a relevant landlord in relation to defects which includes fire and structural defects in relevant buildings (including those over 11 metres). Therefore SGUK would have recourse to require the landlord remediate the building.  

The court stated that for SGUK to succeed in the frustration case, it would need to show that changes to the legislation had either:

• Changed SGUK’s relationship with the landlord; or
• Caused SGUK to be unable to use the premises as intended.

The court rejected the arguments because the building required remediation to deal with fire safety prior to the legislative changes.

The lease

The court spent time analysing the lease and the Agreement for Lease which was agreed in 2004. In particular the clauses relating to insurance.  The Court emphasised that there was an obligation "to rebuild … the whole of the Demised Premises…" The Court said this was a wide obligation and it was obvious that if the whole of the Premises were to be rebuilt, that would take a substantial period of time and SGUK would not have use of the Premises.

Also within the lease, the landlord gave no warranty that the Premises were suitable for SGUK or for any purpose.

The Court concluded that the parties had allocated the relevant amount of risk and either took into account or should have taken into account that there could be fire safety defects.

Furthermore, the Court decided that the Lease was not discharged on the basis of the common purpose of entering into the Lease was frustrated.

Comment

This case highlights that whilst leases are capable of being frustrated, frustration has never been successfully argued in the Courts in relation to a lease.

Parties should be mindful of their continuing obligation to pay the rent (often without set-off!), however, any parties wishing to argue frustration as a result of changes to legislation would need to demonstrate that there were no defects with the property prior to the change in law which appears to be a high bar.

Parties should also pay close attention to the repair and insurance clauses because if they allow for a rebuild of the premises which naturally would take a considerable period of time, it won’t be possible to argue that the premises couldn’t be used because of defects.