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Can a tenant get away with its payment obligations in view of COVID-19 and Government Closure Orders?

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In our previous article, we reported that the court had refused to frustrate a tenancy agreement due to the COVID-19 pandemic and social disruption: The Center (76) Limited v Victory Serviced Office (HK) Limited HCA 1020/2020; [2020] HKCFI 2881. In this article, we will discuss several recent decisions on the same subject. The tenants’ arguments in all of these cases, that their payment obligations were discharged/suspended during the COVID-19 pandemic, failed.

Retail shop cases

In Sunbroad Holdings Limited v A80 Paris HK Limited & Another HCA 735/2020; [2021] HKCFI 1422, the tenant had leased the premises for a term of three years for the operation of a retail shop to sell beauty equipment and hair products. The tenant used part of the premises as a beauty parlour, which was subject to mandatory closure in view of the COVID-19 pandemic, and purported to discharge the tenancy agreement on the ground of frustration. The Master applied The Center and held that the COVID-19 pandemic and social unrest did not fundamentally change the nature of the outstanding contractual rights and/or obligations from what the parties could have contemplated at the time of execution of the tenancy agreement. The Master concluded that there was no restriction preventing the tenant from operating a retail shop. In any event, the mandatory closure of beauty parlours only lasted for 73 days. The tenant was and is not prevented from operating a beauty parlour for a significant portion of the remainder of the term. 

In Holdwin Limited v Prince Jewellery and Watch Company Limited HCA 71/2020 & HCA 414/2021; [2021] HKCFI 2735, the tenant had leased the premises for a total term of nine years for the operation of a retail shop to sell luxury watches, jewellery and high-end products. The tenant ceased its operations in the premises in view of the COVID-19 pandemic, but the landlord refused to accept delivery up of the premises or repudiation of the lease and insisted that the lease was to continue until the end of the term. The tenant argued that the COVID-19 pandemic was a frustrating event, discharging the lease agreement, or alternatively, the rent abatement clause, being a force majeure clause, would have suspended or ceased the tenant’s obligations to pay rent under the lease agreement.

DHCJ William Wong SC commented that the circumstances in which the doctrine of frustration would apply to a lease are “extremely rare” and the tenant’s use of the premises was a matter with which the tenant was alone concerned. The judge considered The Center and Sunbroad and held that it was a non sequitur to say that the COVID-19 pandemic significantly changed the nature of the lease or the parties’ rights and obligations. As such, the defence of frustration failed. Further, the judge held that the COVID-19 pandemic did not fall within the scope of the rent abatement clause, which was premised upon physical damage to the premises only. 

Premises subject to Closure Orders

Unlike retail shops, cinemas and certain other premises have been subject to mandatory closure or certain conditions during the COVID-19 pandemic. However, like tenants of retail shops, as illustrated above, tenants of such premises in Hong Kong and England have also failed in their argument that their payment obligations were discharged as a result of such mandatory restrictions.  

In Star Win Enterprises Limited v The One Property Limited DCCJ 4810/2020; [2021] HKDC 922, the tenant had leased the premises for a term of 13 years from April 2011 as a six-plex cinema complex. The landlord (represented by Deacons) instituted a distraint action, which was uncontested. After making a full repayment, the tenant subsequently claimed that the payments were made under compulsion and/or the mistaken belief that it would be entitled to recover the same. The tenant took out a summary judgment application seeking determination of the following questions: (i) whether the abatement clause in the lease agreement was triggered; (ii) whether it was an implied term of the lease agreement that if pursuant to law and/or order or direction of the Hong Kong Government, the tenant was rendered unable to use the premises, its payment obligations under the lease ceased or were suspended; and (iii) whether the lease agreement was partially frustrated during the period when cinemas were subject to capacity restrictions, with the result that the tenant should be excused from performance of its payment obligations.

The court dismissed the application on technical grounds. HH Judge H. Au-Yeung held that those three questions would not be determinative of the whole action since (i) there is a triable issue of whether there is an abuse of process, since the tenant should have raised those questions in the distraint action; and (ii) the issue of whether the tenant’s payments were made voluntarily could only be resolved at trial. The judge considered that a ruling on the first and second questions should only be made after hearing all evidence. Regarding the third question, as it was not impossible or illegal for the tenant to pay rent, the court remarked that it was difficult to understand what “contractual obligation” under the lease agreement was rendered impossible or illegal. 

In London Trocadero (2015) LLP v Picturehouse Cinemas Limited & Ors [2021] EWHC 2591 (Ch), the tenant had leased the premises as a cinema in London. The tenant argued that (i) there should be terms implied into the leases suspending payment of rent and service charges when the premises could not be used as a cinema; and (ii) there was a partial failure of consideration, since payment under the leases was for the use of the premises as a cinema.   However, the tenant accepted that the leases were not frustrated completely and the landlord was not in breach of the terms of the leases.  

Both arguments were rejected by the English court since (i) there was no such implied term, as it could not pass the tests of business efficacy or obviousness; and (ii) there was no failure of basis, since the use of the premises as a cinema was not “fundamental to the basis” on which the parties entered into the leases, but rather an expectation which motivated them to enter into the leases. Summary judgment was entered against the tenant.

Takeaway These cases once again demonstrate that the courts are reluctant to discharge payment obligations of tenants under lease/tenancy agreements merely because of the COVID-19 pandemic. Even for premises such as cinemas that have been subject to mandatory closure/restrictions, it is unlikely that a tenant will be relieved of its contractual obligations under the lease/tenancy agreement. It is particularly difficult for the tenant to argue that the lease/tenancy agreement is discharged on the ground of frustration.

Key Contacts

Paul Kwan

Partner | Litigation and Dispute Resolution

Email or call +852 2826 5354

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