Irish ruling affirms no doctrine of partial or temporary frustration of a lease in Irish law

The Court of Appeal’s judgment in a case involving retailer Foot Locker has implications extending beyond the immediate parties involved, as it has clarified the court’s interpretation of the doctrine of frustration in the context of commercial leases. The decision has confirmed that the concept of “partial” or “temporary” frustration has no place in Irish law as it is “fundamentally inconsistent with the essence of frustration”.

The ruling underscores the complexity of navigating lease agreements during unforeseen crises like the Covid-19 pandemic. It provides a helpful analysis of the doctrine of frustration and the defence of impossibility for non-performance of an obligation. As businesses and landlords navigate ongoing challenges in the market, the principles outlined in this case also emphasise the importance of meticulous commercial drafting.

The argument over ‘partial’ frustration of commercial leases during Covid-19

Amidst the global Covid-19 pandemic, commercial landlords and tenants faced unprecedented challenges, leading to a series of legal disputes over rental payments during enforced store closures.

In this case Foot Locker, the tenant, sought judicial relief by arguing that the enforced closure of its premises, as mandated by Irish emergency legislation during the early stages of the pandemic, should lead to a finding of "partial” or “temporary” frustration of the lease. Partial frustration, according to Foot Locker, suggested that while the lease remained effectual, the obligation to pay rent should be paused for the duration that the tenant was unable to open the store due to the government's Covid-19 restrictions.

In November 2021, the High Court gave its judgment addressing, firstly, whether a lease can indeed be partially frustrated under Irish law and, secondly, whether Foot Locker had successfully demonstrated that its lease was partially frustrated by the pandemic closures. The High Court denied Foot Locker’s claim, decisively rejecting the notion of partial frustration within the context of Irish law as the "essence" of the doctrine of frustration is that where a contract is frustrated, it is treated as being at an end, and both parties are freed from their mutual obligations under the contract. It was Foot Locker's case that it was free from any obligation to pay rent but was nonetheless entitled to continue to occupy the store. The judge described that as a "form of frustration which does violence to the fundamentals of the doctrine", resulting in what Foot Locker accepted was a "one way street" with "benefits flowing to the tenant without any balancing release of liabilities in favour of the landlord".

Foot Locker appealed to the Court of Appeal, claiming that the High Court erred in its judgment and that there was no reason in principle why the doctrine of temporary or partial frustration could not be given legal recognition.

Its submissions relied heavily on the “user” and “keep open” covenants, which it argued made performance of the contract impossible for the period when the premises were mandated by law to remain closed. It argued that temporary frustration was applicable in respect of a lease and during a specific period to alleviate absolute contractual obligations in the face of a radically different bargain than contemplated by the parties at the time of entry into the lease.

Foot Locker claimed that the High Court erred in judgment because such supervening impediments to performance – the forced closure of the store – have in the past provided a basis for the application of the doctrine of frustration and the temporary suspension of contractual obligations. It further emphasised that the “quintessentially periodic quality” of the lease contained obligations which were several and distinct. Given these specific characteristics and the unprecedented duration of mandated closures, the circumstances giving rise to these proceedings could not have been reasonably contemplated at the time the bargain was struck between the parties.

The Court of Appeal’s decision

The Court of Appeal resoundingly rejected all of Foot Locker’s submissions. It affirmed the High Court’s judgment on both points: that the concept of partial or temporary frustration does not exist in Irish law; and that Foot Locker had not established an entitlement to a declaration that the lease had been in any way partially or temporarily frustrated.

In its analysis, the court closely examined the terms and clauses of the lease that were of critical importance.   The court said that the combination of the provisions of “user” and “keep open” should be properly construed as conferring no legal rights or entitlements but imposing only obligations. They therefore had no negative impact on the fundamental bargain, nor did they frustrate it on a partial or temporary basis during the Covid-19 restrictions.

The Court of Appeal considered the doctrine of frustration in detail, much of which mirrored the judgment of the High Court. It agreed that, when considering whether a contract has been frustrated, it was appropriate to consider whether such an outcome would do justice to the parties. In this case, as Foot Locker had accepted any finding of partial or temporary frustration would be a “one way street”, the court agreed a finding of frustration would not do justice to the parties.

Nor did it meet the proportionality test: the 253 days closure had to be viewed in the context of the entire lease of 35 years, which would have a further four years to run after restrictions were lifted. There was no real impossibility of performance or a fundamental change to the bargain to the extent that enforcing it would be unjustifiable. Foot Locker had accepted it was able to pay the rent. Most importantly, the court focused on the point that frustration, when found, operates to discharge a contract automatically, by operation of the law. It is inherently incompatible with this concept for automatic discharge to only apply temporarily.

A further crucial point emphasised by the court was the existence of express provision in the contract for allocation of risk. The only circumstances in which the payment of rent would be suspended was where all or part of the premises were destroyed or damaged by one of the “insured risks”, which were defined very broadly. Outside of this, the risk of a change of circumstances would be borne by Foot Locker. The court held that Covid-19 was not a supervening event that would be sufficient to displace this voluntary and express allocation of risk.

On the idea of “partial” or “temporary” frustration the court agreed with the High Court’s judgment that even without prior authority on this point, the concept has no place in Irish law as it is “fundamentally inconsistent with the essence of frustration”.

The Court of Appeal decision signals to both commercial landlords and tenants the importance of clear, comprehensive lease agreements that adequately consider potential extraordinary circumstances. As the legal and commercial landscape continues to evolve in this space, this case serves as a critical reference point for future disputes regarding the courts’ narrow interpretation of the doctrine of frustration.

Co-written by Lynsey Burke of Pinsent Masons.