Hong Kong case on frustration of a residential lease during SARS closure

Below is a summary of the Hong Kong case of Li Ching Wing v Xuan Yi Xiong [2004] 1 HKC 353 provided to me by my colleague, barrister Abilene Singh (her details are available here: https://www.vicbar.com.au/profile/9156).

The case suggests that the prospects of success in arguing that a lease is frustrated by closures caused by Covid-19 depend on the duration of the closures and the balance of the term remaining (ie the longer the closures and the shorter the remaining term, the better the tenant’s prospects of success in arguing that the lease was frustrated, and vice versa for landlords resisting claims).

However, there is no ‘bright line’ before or after which a lease will be held to have been frustrated and the only way to determine the approximate location of that line is through litigation. Given the strain that the courts and Tribunal are currently under, this case really does underline the urgent need for legislative intervention during the current crisis.

Ms Singh’s note is as follows:

Facts 

• Residential lease of a flat in Block E of Amoy Garden, in Kowloon, Hong Kong for a 2-year fixed term commencing 1 August 2002.
• In March 2003, many residents of Block E in Amoy Garden were infected with SARS. Accordingly, the tenant moved out on 29 March 2003 to stay with family until 10 April 2003. An isolation order was issued for Block E of Amoy Garden for 10 days. The tenant sent a letter to the landlord to terminate the lease and the landlord accepted his termination (on the basis that the tenant’s letter constituted wrongful repudiation).
• Landlord commenced proceedings to seek damages arising from tenant’s repudiation.
• Issue to be determined was whether the tenant was entitled to terminate the lease and key to the current circumstances, was whether the lease was frustrated by way of the making of the isolation order.

Frustration 

• Cited with approval the UK House of Lords decisions in National Carriers v Panalpina,[1] which had approved the prior decision of Cricklewood Property and Investment Trust v Leightons Investment Trusts.[2] In the former case, Lord Simon of Glaisdale had defined frustration as:

Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance. (at 700F)

• Importantly, Judge Lok said that ‘an event which causes an interruption in the expected use of the premises by the lessee will not frustrate the lease, unless the interruption is expected to last for the unexpired term of the lease, or, at least, for a long period of that unexpired term.’[3] 

• Therefore, emphasis was placed on the length (both qualitative and quantitative) of the supervening event vis a vis the remainder of the lease term. In this case, given that the alleged supervening event, the isolation order, was for a mere 10 days, it was ‘quite insignificant in term of the overall use of the premises.’ 

• The tenant therefore failed in his use of frustration as a defence.[4]

 Writer’s thoughts 

• Careful consideration as to whether frustration arises in certain cases will need to be given.
• In particular, the term of the lease and the remainder term of the lease. Note that presently that the advice from the Federal Government has been that Australian life will be affected for 6 months.
• It is uncertain at this time, whether that means that ‘non-essential’ services will be shutdown for the entirety of this time.
• At the very least, and having regard to what is occurring globally, it could be predicted that non-essential services will be affected for at least 4 weeks. This might provide some kind of guideline in considering whether the frustration defence can be mounted in a particular case.

[1] [1981] AC 675.

[2] [1945] AC 221.

[3] (357).

[4] There were other defences not relevant to these current global health crisis that were considered.