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Can a contract to take an assignment of a commercial lease pre lock down be rescinded (cancelled) in light of the coronavirus pandemic? A Case Study

What happened?

Our client, a café business, entered into a contract to take over an existing lease and agreed to pay a significant cash premium for doing so.

Before the contract was completed, the coronavirus pandemic hit.  The government announced a lockdown and introduced legislation which would have stopped the café from trading.

Naturally, our client became concerned at the prospect of taking a lease and paying a premium for a unit unlikely to generate any revenue for the foreseeable future.

Completion had been set for 24 March 2020 (the “Completion Date’), the day after lockdown became ‘official’. Our client attempted to renegotiate and delay completion.

Unfortunately negotiations broke down. Our client did not complete on the Completion Date and was served with a “notice to complete” on 27 March 2020. This gave our client ten working days to complete (so by 14 April 2020).

Our client now faced the following consequences by failing to complete:-

  1. an application by the vendor to the Court forcing our client to complete (which would include a claim for financial losses caused by the late completion); or
  2. termination of the contract by the vendor keeping the deposit and claiming damages.

How Harold Benjamin helped

The validity of contractual obligations in light of the coronavirus pandemic has been unchartered territory for many lawyers.

In the absence of a force majeure clause (which deals with events outside anyone’s control - you can see an explanation of this in our blog post here: https://www.haroldbenjamin.com/site/blog/harold-benjamin-blog/cancelling-events-during-covid19) in the contract, we considered whether the principle of frustration could apply.  Frustration, is a legal term, and refers to an event that makes it impossible to carry out the terms of a contract, or changes the contract in a fundamental way.

Because the lease our client had contracted to take still had a number of years left in the term and given that the Covid19 issues were only likely to last for a fraction of that term, we did not see it as preventing or altering performance of the contract sufficiently to frustrate it.

We then considered a two-fold argument based on the contract being conditional and the validity of the notice to complete.  

Conditionality

The contract was conditional on getting the landlord’s consent to the assignment.

If consent could not be obtained within 14 working days of the original Completion Date (the “Longstop Date’), the contract could be rescinded (it would be as if the contract had not been made at all). This would include the return of any deposit paid.

In the period leading up to the Longstop Date, rent for the next quarter became due on 25 March 2020.  The responsibility for paying the rent remained with the vendor, who was still the tenant under the lease.  The rent remained unpaid on 27 March 2020 (the date when the notice to complete was served) and on 14 April 2020 (the date when the notice expired), which arguably meant the landlord’s consent to the assignment could no longer be granted and the contract remained conditional. As the landlord’s consent was not obtained by the Long Stop Date, we argued that our client is entitled to rescind the contract.

Notice to Complete

It is a requirement when a party serves a notice to complete, that they are ready, willing and able to complete. The inability to obtain the landlord’s consent to the assignment due to the rent remaining unpaid on the date the notice was served and when it expired, meant, in our view, that the vendor could not be considered ready, willing and able to complete. It is arguable that the notice was served prematurely and thus potentially invalid.

Rescission

Acting on our two-fold argument, we advised the vendor’s solicitor that their notice was invalid. We then served a notice rescinding the contract on the basis that the Longstop Date had passed and the contract remained conditional and demanded the return of the contractual deposit.

Related practice areas/people

Our firm contains a number of lawyers who work cross-departmentally to provide a co-ordinated, specialist service for commercial contract disputes. If you have found yourself in a similar situation and would like advice, please contact:

Robert Souber
Solicitor and Partner
Head of Commercial Property - Retail and Leisure
Email: robert.souber@haroldbenjamin.com

Jonathan Mahony
Solicitor and Partner
Head of Dispute Resolution and Litigation
Email: jonathan.mahony@haroldbenjamin.com

Contact our experts for further advice

View profile for Jon MahonyJon Mahony, View profile for Robert SouberRobert Souber

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