Frustration and property rights in land

The doctrine of frustration operates as a means by which a contract may be automatically discharged where an event occurs (without default of either party and for which the contract makes no sufficient provision) which either renders performance of contractual obligations impossible, or at least significantly different from what was intended: Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696. In its current form, therefore, the doctrine arises primarily in the context of contract law. It has also been held to apply in the context of leasehold estates: see, National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 and Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch). But to what extent may the doctrine apply so as to terminate other property rights in land?   

Underlying basis of the doctrine

The currently accepted view of frustration is set out by Lord Reid in Davis Contractors, who stated that frustration depends, in most cases, on the true construction of the terms of the contract read in light of the nature of the contract and the relevant surrounding circumstances when the contract was made. The doctrine, therefore, is essentially a risk allocation procedure in so far as the question is whether it is reasonable to place the risk of non-performance for the events which have happened on one party or the other, or neither. If it is not reasonably possible to place the risk on either party then the contract is frustrated. If, on the other hand, the risk is placed on a particular party (by contract or otherwise), then the doctrine does not apply. This, in turn, has been held to give rise to a “multi-factorial” approach involving an examination of: (1) the terms of the contract; (2) its matrix or context; (3) the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract; (4) the nature of the supervening event; and (5) the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances: Edwinton Commercial Corp v Tsavliris Russ (Worldwide Salvage and Towage) Ltd (The Sea Angel) [2007] EWCA Civ 547.

Contracts for the sale of land

Since the House of Lords decision in National Carriers, objections to the application of the doctrine to leases, based on the parties’ relationship as giving rise to not only a contract but also an estate in land, have been rejected in favour of the modern view that the parties’ rights under the lease are governed by executory promises with their origins firmly grounded in the law of contract. That being the case, it is a small step to concede that the doctrine should apply equally to contracts for the sale of land notwithstanding that the foundation of the agreement is the transfer of an estate in land. Although there is no clear authority in point, several dicta in the English case law support the notion that frustration applies to sales of land: Amalgamated Investment & Property Co Ltd v John Walker & Sons Ltd [1977] 1 WLR 164; E. Johnson & Co (Barbados) Ltd v NSR Ltd [1997] AC 400. In Universal Corporation v Five Ways Properties Ltd [1978] 3 All ER 1131, concerning a change in the Nigerian exchange control regulations which left the purchaser without funds, Walton J observed, at 1135: “Whether or not the doctrine of frustration can ever apply to a contract for the sale of land in circumstances, at any rate, where the land is still there may well be open to doubt, but I do not pause to enquire; I assume for present purposes that it is. But quite emphatically the doctrine of frustration cannot be brought into play merely because the purchaser finds, for whatever reason, he has not got the money to complete the contract.”

Similarly, in Hasham v Zenab [1960] AC 316, the Privy Council expressly envisaged an event frustrating an order for specific performance before the completion date. Lord Tucker stated, at 330: “The court will not, of course, compel a party to perform his contract before the contract before the contract date arrives, and would give relief from any order [of specific performance] in the event of an intervening circumstance frustrating the contract.”

It seems, therefore, that the English courts are prepared to admit the doctrine of frustration as applying to contracts for the sale of land, but the actual circumstances in which the doctrine will be held to frustrate the contract will be rare amounting, in line with the analysis in Davis Contractors, to some catastrophic event which renders performance of the contract either impossible or radically different from that envisaged under the contract. 

Options to purchase land

An option to purchase is a contractual agreement relating to a piece of land that allows the purchaser the exclusive right to purchase the land by the exercise of the option. The option usually contains an agreed purchase price and is expressed to be valid for a specified period. The purchaser does not have to buy the property, but the vendor is obligated to sell to the purchaser at the purchaser’s election within the terms of the option agreement. Such an option (sometimes referred to as a “call” option) is an estate contract and creates an equitable interest in the land: London & South Western Railway v Gomm (1882) 20 Ch D 562.

There is English authority for the application of the doctrine to options to purchase land. In Denny, Mott and Dickson Ltd v James B Fraser & Co Ltd [1944] AC 265, an agreement entered into between saw millers and timber importers stated that the former should purchase all their supplies of certain wood from the latter and should let them a certain timber yard with an option to purchase it (or take it on a long lease) on certain terms. As a result of war time regulations, further transactions between the parties became illegal for an indefinite period. The Privy Council, on appeal from the Scottish Court of Session, held that the regulations operated to frustrate the whole agreement and that, therefore, the option to purchase lapsed since it only arose in the event of the agreement being terminated by a notice in accordance with the terms agreed between the parties. To this extent, the option to purchase was held to be entirely dependent on the main part of the agreement relating to the trade in timber. 

Easements

It is certainly possible for an easement to be impliedly released if it can be shown to be permanently unexercisable, or to have been abandoned by the dominant owner: Benn v Hardinge (1993) 66 P & CR 246 and Williams v Sandy Lane (Chester) Ltd [2006] EWCA Civ 1738. It is also apparent that an easement which has become impossible to use will be treated as impliedly extinguished. In Jones v Cleanthi [2007] 1 WLR 1604, a tenant of a flat was granted an easement to use communal refuse bins in an area at the rear of the building. The landlord was required to carry out certain works to the building in order to comply with a fire safety notice under the Housing Act 1985. These works involved the building of a wall on the ground floor blocking off the hallway which gave access to the bin area. The Court of Appeal held that the statutory obligation relieved the landlord from any liability as a result of the easement being unexercisable, but the easement itself had not been extinguished and was only suspended because it was possible that, at some future time, fire safety regulations (or the use of the property) might change so that the easement could be used again.

The case is significant in so far as it recognises the possibility of an easement being extinguished by a frustrating event. 

Indeed, the argument presented on behalf of the tenant was characterised by references to the likely discharge of a lessor’s contractual obligations to his lessee “in circumstances where the statute frustrates the performance of the obligation": at 1620. 

Moreover, the tenant placed much reliance on the earlier case of Yarmouth Corporation v Simmons (1878) 10 Ch D 518, where the relevant statute had authorised the erection of a substantial structure which was intended to be permanent and the existence of which was physically inconsistent with a public right of way in that it prevented access onto a beach. Fry J held, not surprisingly, that by necessary implication, the existence of the statutory power extinguished the public right of way. 

In his Lordship’s words, “there was a physical impossibility in the persons who had exercised the alleged right continuing to exercise it in the manner in which they had previously done": at 526. By contrast, in Jones, the lease had another 72 years to run which, in the Court of Appeal’s view, gave ample time for the circumstances to change so far as the requirements for fire safety were concerned. Reference may also be made to Huckvale v Aegean Hotels Ltd (1989) 58 P & CR 163, where the Court of Appeal considered whether an easement could be extinguished by its ceasing to accommodate the dominant tenement. 

In the course of his judgment, Slade LJ stated: “. . . in the absence of evidence of proof of abandonment, the court should be slow to hold that an easement has been extinguished by frustration, unless the evidence shows clearly that because of a change of circumstances since the date of the original grant there is no practical possibility of its ever again benefitting the dominant tenement in the manner contemplated by the grant.”

Although Jones and Huckvale concerned the express grant and reservation, respectively, of an easement, there is no reason, in principle, why the doctrine should not apply to profits a prendre which, like easements, are grounded in contract in so far as they may be granted expressly either by statute or deed. Take, for example, a profit a prendre granted to X by deed for a period of 20 years to pick apples from an orchard on Y’s land. After two years, the whole orchard becomes the subject of a compulsory purchase order to make way for a new motorway across the land. In these circumstances, the profit would, it is submitted, be automatically extinguished or discharged as a result of frustration. Moreover, it should make no difference if the right to pick the apples had arisen impliedly or by prescription.

Mortgages

Mortgages may be created in two different ways: (1) by a grant by demise (i.e., a term of years absolute) and (2) by legal charge (i.e., a charge made by deed under s.85(1) of the Law of Property Act 1925). The former, being founded on a landlord and tenant relationship, is presumably capable of frustration like any other lease made between the parties. Because the mortgage creates a demise, both the lender and the borrower have a legal estate in the land but, applying National Carriers, this should not preclude the doctrine from discharging the mortgage in appropriate circumstances. 

With registered land, it is no longer possible to create a mortgage by granting a lease. Instead, s.23(1) of the Land Registration Act 2002 provides that a legal mortgage of registered land can only be created by means of a legal charge which grants the borrower a legal interest in the lender’s land until the mortgage is repaid. This charge, although not conferring on the lender any legal term or estate in the land, is statutorily deemed to invest the lender with the same protection, powers and remedies (including the right to take proceedings to obtain possession) as if a leasehold term had been created in their favour: s.87(1) of the Law of Property Act 1925. In other words, the lender under a legal charge has the statutory equivalent of a term of years absolute: Four Maids v Dudley Marshall Properties Ltd [1957] Ch.

Significantly also, as mentioned earlier, the legal charge has to be made by deed. In essence, therefore, the legal charge is founded in contract because there are contractual obligations imposed on both the lender and the borrower in relation to the mortgaged property. In particular, the borrower covenants to repay the borrowed money (together with any interest) and, if the borrower defaults, the lender has an action on the borrower’s personal covenant to repay the mortgage. Given, therefore, the ‘live’ contractual basis of the mortgage, it is submitted that the doctrine of frustration should, in principle, also apply to this form of mortgage transaction. 

The consequences, however, of a frustrating event may be somewhat limited from the borrower’s perspective in that they will still be obliged to repay the loan under their personal covenant in the mortgage. The lender, on the other hand, would presumably lose their right to repossess (and sell) the mortgaged property in the event of the land being destroyed as a result of the frustrating event. 

Their right of foreclosure would also be lost given that they are no longer able to step into the shoes of the borrower and become registered as proprietor of the land. In any event, there would be little point in seeking a foreclosure order assuming the land is now worthless; a foreclosure order would also extinguish the personal covenant of the borrower leaving the lender effectively without any remedy to pursue their debt. In essence, therefore, the effect of frustration, it is submitted, would be to destroy the lender’s security and discharge all remedies associated with their right to the land, but still leave them with the ability to bring a personal (contractual) action on the borrower’s personal covenant and obtain a money judgment for the amount of the loan.

Copyright & permissions