488 total views
In response to the increasing confirmed COVID-19 cases in Hong Kong, the Hong Kong Government has enacted the Prevention and Control of Disease (Requirement and Directions) (Business and Premises) Regulation (Cap. 599F) (the “Regulation”) to implement various measures (the “Measures”), inter alia, restricting and regulating the mode of operation of catering businesses and shutting down a range of premises including amusement game centres, bathhouses, fitness centres, places of amusement or entertainment, party rooms, beauty parlours, club-houses, nightclubs, karaoke lounges, mahjong-tin kau premises, and massage establishments, until 23 April 2020 or further directions (together the “Affected Businesses”).
As we last discussed the application of force majeure clauses in commercial contracts, we shall consider in this article whether force majeure, if not the doctrine of frustration, is
applicable in tenancy agreements amidst the time that businesses struggle in paying rentals (when the premises can’t be used) and consider how a properly drafted tenancy agreement may help with the situation.
The common law doctrine of frustration
In Hong Kong, the doctrine of frustration is invoked based on common law principles and with specific legislation provisions addressing the effects of frustration on contract. This is different from “force majeure” which is triggered by contractual clauses. There is no room for the doctrine of frustration to apply and set aside the contracts if parties have provided for a force majeure clause in the contracts.
Frustration arises where an event which occurs after the formation of the contract and is unforeseen, unexpected or beyond the parties’ control rendering it impossible to perform the contract, and/or where the underlying contractual purpose is radically changed from what was undertaken at the time the contract was entered.
Frustration is often narrowly construed by the Court since frustration has the effect of bringing the entire contract automatically to an end, without either party’s act or election and the parties are released from their unperformed future obligations. The Court will be slow to excuse parties from performing the contract and it will be not sufficient that the frustrating event has made a contract more onerous or costly to perform.
The landmark frustration case in coronation cancellation
The long traditional landmark case on the doctrine of frustration is Krell v Henry  2 KB 740, a tourist rented a hotel room for watching King Edward VII’s coronation procession at a high price. The procession was in the end cancelled as the King fell sick. It was decided that the tourist did not have to pay for the rent of the hotel room as the purpose of the contract was frustrated by the cancellation of the procession.
Whether a tenancy agreement can be frustrated by COVID-19?
On 11 March 2020, the World Health Organisation declared the COVID-19 outbreak a pandemic after its earlier announcement describing it as an epidemic in January 2020.
As the global and local measures for containing the pandemic have drastically escalated causing commercial hardship on businesses, this virus situation is likely to be said “unforeseen” at the time of entering into contracts and through no fault of either party, the key obstacle of establishing frustration will be showing that there is “radical difference” in the parties’ obligations.
In Li Ching Wing v Xuan Yi Xiong  1 HKLRD 754, a tenant of a residential flat who was ordered to be subject to a 10-day isolation order issued by the Department of Health due to the outbreak of SARS in 2003, sought to argue that the 24-month fixed term tenancy agreement was frustrated since the subject flat was uninhabitable for 10 days.
The Hong Kong Court rejected the tenant’s arguments for the application of the doctrine of frustration and held that 10 days out of a 24-month tenancy agreement (which still had 9 months left in the term) was a short duration and had a minimal impact on the agreement in the circumstances.
The Court considered that although the outbreak of SARS was arguably an unforeseeable event, it did not go as far as to significantly change the nature of the rights and obligations arising from the lease. Unless the interruption was expected to last for the period of the unexpired term of the lease, or at least, for a long period of it, the tenancy agreement would not be frustrated.
Are the Affected Businesses entitled not to pay rent?
As the matter presently stands, the Hong Kong Government will review the strength of the measures adopted in the Regulation as circumstances require and hence the adverse impacts on the Affected Businesses remain to be fully reflected. It is yet to see if there will be further additions to the list of business closures.
In the event that there is no applicable force majeure clause in the tenancy agreements, the doctrine of frustration would have to be looked into, together with the specific factual circumstances of each case.
The Measures are unprecedented in Hong Kong and arguably unforeseeable events. In establishing frustration, the Court would take into account the period and scope of interruption (e.g. extension of holidays, delays in full resumption of business, quarantine periods, isolation orders, forced shutdowns) caused by the Measures as compared to the outstanding period for performance under the tenancy agreements contract with a view to determining whether the Measures cause a radical change in the nature of the contract.
Unless the Measures are held to radically change the nature of the rights and obligations under the contract, the tenants’ obligations, including the obligation to pay rent pursuant to the tenancy agreement are likely to subsist. Sad but true, without the rescue of appropriate clauses, a tenancy agreement is not likely to be discharged automatically for future performance merely because it turns out to be more difficult or onerous to perform.
Suggested relief measures for tenants
As landlords and tenants are bound by the agreements they entered into, we encourage the Affected Businesses to negotiate relief measures, including agreements on temporarily reducing rent, securing replacement tenants, early termination of tenancy agreements, or partial surrender or sublet or assignments with their landlords. The Affected Businesses should also document their details of the interruption and impacts of the Measures on them for record.
Parties are also advised to review their current contractual terms to see if adequate protection clauses, such as force majeure and other break or exit clauses are in place. For parties entering into a new tenancy agreement, a careful drafting of the contract for conducting businesses while the economic activities generally slow down are recommended.
When in doubt of your legal rights and entitlement, seek legal consultation to address your concerns.
Disclaimer: The article is for reference only and should not be construed or relied on as legal advice in whatsoever manner. Please engage a solicitor to seek formal legal advice. LegalClarus does not provide legal advice.