27 August 2020

Forced Closure Due to COVID-19 Just Not Frustrating Enough

Chris Lillie

In the recent case of Happy Lounge Pty Ltd v Choi & Lee Pty Ltd and Anor [2020] QDC 184, the Brisbane District Court has held that orders related to the public health response due to COVID-19 resulting in the forced closure of a bar and café in the Brisbane nightclub area of Fortitude Valley was not an event permitting terminating the Business Sale Contract due to its frustration.

The buyer, Happy Lounge Pty Ltd, had entered into a contract with Choi & Lee Pty Ltd (as trustee) to purchase a bar and lounge known as “The Palace” (“Contract”).  The contract was in the form of the standard REIQ Business Sale Contract used in most small business sales in Queensland.  All conditions, including the landlord’s consent to the assignment of the lease and approval of the transfer of the liquor licence, had been satisfied and the Contract was effectively unconditional.

On 23 March 2020 Queensland’s Chief Health Officer issued a Public Health Direction under the Public Health Act 2005 which prohibited non-essential businesses, including The Palace, from operating from that day until the end of the public health emergency (“Forced Closure”).

The order was issued only one day prior to completion of the sale of The Palace on 24 March 2020.

The buyer refused to settle on the day of settlement and subsequently terminated, alleging that the seller had failed to comply with the terms of the contract.  The seller then sued for specific performance of the Contract.

Arguments as to frustration of Contract

The REIQ Business Sale Contract standard conditions do not contain a force majeure clause.  As an alternative, the buyer asserted that the Contract had been frustrated as a result of the Forced Closure.  The common law doctrine of frustration permits a contract to be terminated where an occurrence:

had the effect of radically changing the situation in which the Contact was to be performed, so as to make performance fundamentally different from that contemplated by the parties at the time the Contract was made.

As we noted in our earlier discussion of the subject on 23 March 2020, the doctrine of frustration requires a very high threshold to be met.  As the Court noted in Happy Lounge:

The incidence of hardship, inconvenience or material loss to a party on account of increased expense, delay or onerousness are generally not sufficient to frustrate a contract. All contracts involve the preparedness by a party of an obligation to perform in the face of an uncertain future.

The buyer asserted that the Contract was frustrated because of the inability of the seller to perform certain of its obligations due to the imposition of the Forced Closure.

First, the buyer argued that the seller could not give, and the buyer could not take, possession of the “Business and the Business Assets” as a result of the Forced Closure as required by the Contract.  The Court found that:

  • the Forced Closure did not interfere with the performance of those obligations, instead placing restrictions on the buyer’s freedom to operate once it took possession of the Business.
  • The fact that only a small portion of the value of the business had been allocated to goodwill in the Business Sale Contract was an indication that the Buyer was not deprived of substantially the whole benefit of the consideration under the Contract.
  • The Forced Closure was likely to persist only indefinitely but most likely for a short period as compared to the overall potential length of the lease (up to 12 years)
  • The fact that at the time of signing of the Contract the Covid-19 crisis was “widely known to be unfolding” and the potential for restrictions on the use of the premises was relevant and should have been foreseen by the buyer.

Second, the buyer argued that the Forced Closure meant that the seller was unable to operate as a going concern (trading business) up to Completion as required under the Contract and that this caused the frustration of the Contract.  The Court noted that while the seller was unable to operate as a going concern for the one-day period between the Forced Closure and the completion date, it had done so for the 26 days from the Contract signing and had thus the obligations had been substantially performed.

As a third ground of frustration, the buyer contended that the seller was no longer able to attend at the business premises to provide the required tuition/assistance for the week following Completion, as well as provide introductions to suppliers, clients and staff.  The Court held that while this was inconvenient, there was nothing in the clause that indicated that the introductions needed to take place at the business premises.

Arguments as to seller’s breach

The buyer also made arguments that the seller had breached the Business Sale Contract due to its failure to obtain the lessor’s mortgagee’s consent by the settlement date.

The buyer had better luck with this argument.

The relevant boxes in the REIQ Contract Reference Schedule were both ticked so that the Contract stated that the consent of the mortgagee was both “required” and “not required”.

Notwithstanding that, the Court was satisfied that the relevant standard condition applied because even though there was not a condition in the lease requiring the lessor to obtain the mortgagee’s consent, there was one in the relevant mortgage and that therefore the mortgagee’s consent was required.

The obtaining of the consent of the lessor’s mortgagee to the assignment of the lease is an area which is regularly overlooked by all parties – lessors, buyers and sellers in business sale transactions involving the REIQ standard Business Sale Contract and an area which will now need to be sharpened across Queensland practice.

The buyer also successfully argued that the seller breached the contract by failing to properly comply with a special condition that required the seller to provide evidence of the value of the stock.

Ultimately the Court held that the buyer had validly terminated the Contract and was entitled to the return of its deposit.

Watch this space

Be prepared for a tsunami of legal proceedings relating to force majeure and frustration as the events of the March lockdown begin to play out in trials across the country

If you would like to discuss this article and how it may impact you and your business, please contact Chris Lillie.

>
>
>
>

Stay in the know

Get our latest news and publications delivered straight to your inbox

  • This field is for validation purposes and should be left unchanged.

Related Posts

04 November 2020 Publications

Second Mortgages Versus Caveats

Find out more
09 October 2020 Publications

Practice Guide for Second Mortgages

Find out more
07 October 2020 Firm Updates

Congratulations Nadia Sabaini – Finalist – Banking and Finance Partner of the Year

Find out more
>
>
>
>