Making Lease Payments a Lessor Problem

• Publication year: 2022

Making Lease Payments a Lessor Problem

Devin C. Berrigan

Making Lease Payments a Lessor Problem

Cover Page Footnote

* J.D. Candidate, 2023, University of Georgia School of Law; B.A., 2019, University of Georgia. I would like to thank Dean Kent Barnett for his guidance and advice in writing this Note and the Editorial and Executive Board Editors for their help.

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MAKING LEASE PAYMENTS A LESSOR PROBLEM

Devin C. Berrigan^*

The frustration of purpose doctrine is a contracts defense that has garnered increased interest since the COVID-19 pandemic's initial wave. To manage this public health emergency, many governments have issued orders restricting the operation of businesses. These orders, while necessary, put commercial lessees in a bind once it came time to pay rent because these restrictions drastically cut their profits. Other frustrating events, like war and natural disasters, cause the same problems, yet the current frustration of purpose doctrine is too narrow to be practically helpful to these lessees. This Note examines the English and Canadian frustration doctrines and draws on both in proposing two alterations to the American doctrine. These alterations would remedy the doctrine's ineffectiveness, brought to light recently by the COVID-19 pandemic, and would attempt to ensure that the risk now falls on the party better equipped to bear it—the lessor.

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TABLE OF CONTENTS

I. INTRODUCTION...................................................................405

II. BACKGROUND...................................................................406

A. PUBLIC POLICY CONSIDERATIONS.............................408

1. Allocation of Risk.............................................408
2. Implied Conditions..........................................409

B. FRUSTRATION AND LEASES ......................................410
C. COVID-19 AND LEASES ............................................412
D. FRUSTRATION IN OTHER COUNTRIES .......................413

1. United Kingdom...............................................413
2. Canada.............................................................418

III. ANALYSIS........................................................................422

A. FIRST ALTERATION...................................................422
B. SECOND ALTERATION...............................................424
C. OTHER CONSIDERATIONS.........................................425
D. COUNTERARGUMENTS.............................................425

IV. CONCLUSION...................................................................426

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I. INTRODUCTION

"Man plans, God laughs."¹ A scheduled flight home is delayed for months because of a pandemic.² A vacation rental's view is obscured by smoke from nearby wildfires.³ A business's permits will not be issued because of a neighbor's refusal to comply with the municipal code.⁴ A restaurant can no longer operate for in-person dining because of local, state, or federal orders.⁵ All of these are examples of events that might frustrate a contract. It might not seem fair to enforce a contract in these instances because an event outside the control of either contracting party has frustrated the contract's purpose.

The frustration of purpose doctrine is an oft-discussed yet rarely implemented legal doctrine that has garnered increased interest since the United States first felt the COVID-19 pandemic's effects.⁶ The inevitability of pandemics, wars, and natural disasters means that these acts of God will continue to frustrate leases into the foreseeable future. In this light, the frustration of purpose doctrine should be reevaluated. This certainty that frustrating events will occur means that a more just solution should be implemented to aid lessees who are stuck in leases and required to pay rents for spaces they no longer need.

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This Note argues that the frustration of purpose doctrine should be expanded to allow for easier lease payment forgiveness in commercial settings by softening the substantial frustration requirement and clarifying the foreseeability requirement. Part II examines the frustration of purpose doctrine's origin, policy reasons for its implementation, and its current use in the United States. This Part also compares the frustration of purpose doctrines in the United States, the United Kingdom, and Canada. Part III identifies a problem with the doctrine—that it is too narrow to be practically useful—and proposes alterations to it.

II. BACKGROUND

The frustration of purpose doctrine excuses performance when a party's purpose for entering into the contract has been totally, or near totally, destroyed.⁷ Generally, "[t]he contract defense of frustration requires that: (1) the [party's] principal purpose[] in making the contract is frustrated; (2) without that party's fault; (3) "by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.'"⁸ In the foundational case Krell v. Henry,⁹ which created the frustration of purpose doctrine, the court held that a promisor was excused from his obligation to pay for the room he had rented when the coronation procession he had planned to view from the room was postponed.¹⁰ The court in Krell reasoned that because the condition that the coronation would occur was "contemplat[ed by] both parties" and was "the foundation of the contract," its nonoccurrence was sufficient to frustrate the contract and suspend performance.¹¹

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Further, the court noted that the agreement was a license to use the room rather than a demise of the property.¹² The entire nation assumed that the coronation was inevitable,¹³ and the event's postponement was so unforeseen that it caused unrest throughout the United Kingdom.¹⁴

The frustration of purpose doctrine must be distinguished from the related, and often confused, doctrines of impossibility and impracticability. These other doctrines excuse a party's obligations only if they have become incapable or nearly incapable of being performed.¹⁵ Because performance is still possible in cases of frustration,¹⁶ the doctrine generally serves the interests of parties "[who] are to pay money in return for [their] performances," while the doctrine of impracticability generally benefits parties who have agreed to provide a good or service.¹⁷ For example, defendant owners who provided the use of their music hall were excused from performance under the impossibility doctrine when the music hall burned down because they were no longer able to provide that service.¹⁸ But when a contractor no longer needed the concrete medians it had requested from its subcontractor because its state

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department customer changed its order, it was excused from paying for lost profits under the frustration doctrine.¹⁹

Despite the distinct requirements of these doctrines, their application varies by court. In Lloyd v. Murphy,²⁰ the leading American case on frustration of purpose, the defendant car dealer failed to carry the heavy burden of proving that the value of his lease with the plaintiffs had been destroyed when the federal government limited the sale of automobiles as part of wartime rationing.²¹ Unlike in Krell, in which the defendant licensee's entire purpose for renting the room was destroyed and he would have gotten nothing that he bargained for had he performed, the defendant car dealer in Lloyd was still able to conduct its business, albeit at a smaller and less profitable scale.²² In addition to the requirement that the purpose of the contract be frustrated, the defendant will not be able to recover if they contributed to the frustration.²³ Finally, foreseeability of the frustrating event is not sufficient to bar recovery; it is, however, "a factor to consider."²⁴

A. PUBLIC POLICY CONSIDERATIONS

1. Allocation of Risk. As the court in Lloyd explained, the decision of whether to allow the frustration defense rests largely on public

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policy.²⁵ Often, contracts will allocate the risks from acts of God using a force majeure clause.²⁶ If the parties do not do so, however, courts may have to determine to which party the contract implicitly assigns the risk.²⁷ In determining who bears the risk of a contract, courts often consider who is in a better position to mitigate the loss.²⁸ For example, in Krell, because the plaintiff lessor would be able to relet his room for the new coronation date, the defendant was excused from the remainder of the payment.²⁹ If the contract allocates the risk already, however, courts are less willing to excuse performance.³⁰ This is true even if the risk has not been explicitly allocated, but instead is so obvious as to be implicitly allocated.³¹

2. Implied Conditions. Excusal of performance is also justified by the idea that the nonoccurrence of an implied condition means that the contract has lost the higher value or special qualifications that

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the bargaining parties expected the contract to have.³² This reason relates to the requirement of substantial frustration because the contract's purpose has been frustrated if the consideration being paid has lost its value. The lost value or qualifications must also have been the principal purpose for making the contract.³³ Generally, courts will interpret the party's purpose for a contract broadly, which creates a high bar for parties to meet when trying to get their performance excused.³⁴

B. FRUSTRATION AND LEASES

While this doctrine has been used sparingly to excuse performance, it is even more rarely used to excuse a lessee from their rent obligations under a lease.³⁵ In fact, the leading American

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case on frustration involves a lessee who was made to pay their rent.³⁶ A leasehold is a conveyance, not just a contract, so the bar to demonstrate frustration has often been held higher.³⁷ A transfer of a land estate transfers additional rights to the grantee than what a party would receive in a contract.³⁸ Courts tend...