Property & Real Estate Barristers
The Lockdown and Holiday Lets
14th April 2020
Intro
There will have been many cottages lying empty over the Easter period. Many of them will have been booked and the person who booked will have paid a deposit. What is the position? Are they liable to pay the balance? Can they recover the deposit? A cursory search of such guidance as there is online suggests that the doctrine of frustration may have been overlooked.
What is frustration?
The doctrine of frustration operates to bring a contract to an end because of the effect of a supervening event which was neither foreseen by nor is the fault of either party. The effect of frustration is to release both parties from any further performance of the contract. In Davis Contractors Ltd v. Fareham UDC, [1956] 1 AC 696 at 729 Lord Radcliffe set out in general terms the test for frustration:
“…frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.”
One of the “coronation cases” (cases relating to when the coronation of King Edward VII was postponed because of the illness of the King), provide an illustration of when a short let would be frustrated. In Krell v. Henry [1903] 2 KB 740, the defendant agreed to hire the plaintiff’s flat in Pall Mall for 26 and 27 June (days, but not nights). These were the days it had been announced that the Coronation processions would take place and pass along Pall Mall.
The contract was frustrated because the common purpose of the parties i.e. the provision of a room with a view of the coronation procession could no longer be carried into effect.
Application to short lets
Inevitably, the court must approach frustration on a case by case basis, but it is possible to make some general observations. In considering whether there is a common purpose, the court should look at the following matters: (1) the terms of the contract itself; (2) its matrix or context; and (3) the parties’ knowledge, expectations, and assumptions in particular as to risk.
Obvious candidates for frustration would be short lets where the premises have, to the knowledge and expectation of both landlord and tenant, been let for a particular event which will no longer happen e.g. the letting of a stand in a convention centre for an event which will no longer happen. However, given the “lockdown” there is reason to believe that the doctrine of frustration may have wider reach.
During the emergency period, no person may leave the place where they are living without reasonable excuse. That is the effect of Regulation 6 (1) of The Health Protection (Coronavirus, Restrictions) (England) Regulations 2020. As going on holiday does not constitute a reasonable excuse there is a good argument that the common purpose of many holiday lets has been frustrated.
If the contract anticipates the supervening event then the contract will not be frustrated; the terms of the contract will be paramount. So it is important to read with care the entirety of the contract of letting in order to see if there is a “force majeure” or similar clause.
If the clause does not make provision and the contract is found to be frustrated each party is released from performance, so renters need not pay any outstanding balance.
What about deposits?
Frustration releases both parties from any further performance of the contract. The Law Reform (Frustrated Contracts) Act 1943 allows the recovery of prepaid sums.
Section 1(2) of the Act provides that:
“All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as ‘the time of discharge’) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be payable:
Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.”
The effect of this subsection is to entitle a contracting party to recover money paid to the other contracting party prior to the frustrating event. The court has no discretion over the question whether a sum already paid is recoverable: the only discretion concerns the allowance for expenses.
Renters who have paid a deposit may seek to rely on this provision to obtain its return.