In brief
- The TCC held that a tenant could not rely on frustration to escape a 25-year lease, despite life-critical cladding defects requiring remediation likely to outlast the remaining term.
- The lease's wide repairing covenant, narrow insured-risks carve-out, and exclusion of fitness-for-purpose warranties placed latent defect risk squarely on the tenant.
- Post-Grenfell legislation does not, by itself, satisfy the frustration test; tenants withholding rent on this basis risk a substantial arrears judgment, while clear risk allocation in a lease supports landlords seeking summary judgment.
Overview
The case of Into Nominee One Limited and Into Nominee Two Limited v Study Group UK Limited and the Daily Mail and General Trust PLC asked whether a tenant can walk away from a 25-year lease because the building it occupies has life critical cladding defects that will take years, possibly the rest of the lease term, to fix. The Technology and Construction Court's answer was no.
Study Group UK Limited ("SGUK"), the tenant of Voyager House, a purpose-built residential school in Brighton (the "Property"), argued that widespread combustible cladding and fire-stopping failures frustrated the lease, relieving it of its obligation to pay rent. SGUK's evidence was that the building was unsafe to occupy, remediation could not begin until the litigation concluded, and the combined works would take longer than the six years remaining on the lease. It had stopped paying rent despite a set-off clause expressly preventing it from doing so.
Mr Roger ter Haar KC, sitting as a Deputy High Court Judge, rejected SGUK's frustration defence as a matter of law and held that the Into Nominee companies (the "Landlord") were entitled to summary judgment. The Landlord sought summary judgment for rent arrears of just over £9 million, however the quantum of the arrears is to be resolved as part of the consequential matters.
The result is a warning for tenants tempted to treat post-Grenfell building safety defects as an escape route from paying rent, and a reassurance for landlords that risk allocation at the drafting stage of a lease remains key.
The building, the lease and the discovery of defects
Voyager House comprises an academic block and a four-storey residential block, linked by a glazed corridor. In 2007, the Property was let to SGUK for a 25-year term expiring on 6 September 2032 (the "Lease"), with Daily Mail and General Trust PLC acting as guarantor. For 14 years, SGUK operated successfully as a residential teaching facility for international students.
That changed in 2021, when post-Grenfell audits prompted SGUK to survey the external walls. The findings, which the Judge accepted for the purposes of the application, revealed an absence of effective cavity barriers, fire-stopping combustible insulation, and defective internal compartmentation and fire doors. SGUK began winding down operations in early 2022 and stopped paying rent. The Landlord sued for arrears and applied for summary judgment.
Why the frustration defence failed
The doctrine of frustration can, in principle, apply to a lease, National Carriers Ltd v Panalpina (Northern) Ltd settled that in 1981. However, only two decisions on frustration of leases exist, National Carriers and Canary Wharf (BP4) T1 Ltd v European Medicines Agency and the Judge commented that no lease has ever actually been held frustrated.
The test for frustration is drawn from Lord Radcliffe in Davis Contractors Ltd v Fareham Urban District Council. It asks whether a supervening event renders performance radically different from what the parties undertook. Mere hardship, expense or delay is not enough. Applying that test to a 25-year lease is a tall order and the Judge relied on academic commentary from Treitel, Frustration and Force Majeure, 4th edition (2021), which commented that parties to long-term arrangements are taken to have accepted the risk of unfavourable change over time.
The court did not consider that SGUK had an arguable case that the lease had been frustrated. It rejected SGUK's case for three reasons. First, the parties did not share a common expectation that the Property would be defect-free. The Agreement for Lease showed the opposite. It imposed a defects liability period, after which the Landlord was excused from liability even for latent defects, leaving the parties to rely on contractor and consultant warranties instead.
Second, the Lease itself allocated risk between the parties. The full repairing covenant required SGUK to rebuild, reconstruct, renew or replace the premises whenever necessary. The judge noted this was a very wide obligation and that the only carve-out for damage from insured risks included matters, such as fires or storms. As cladding and fire-stopping defects were not insured risks, they fell within SGUK's uncapped rebuilding obligation, reinforced by a separate clause disclaiming any landlord warranty that the Property was fit for SGUK's purposes.
Third, SGUK's alternative case relied on post-Grenfell legislative changes, including the Fire Safety Act 2021 and the Building Safety Act 2022. The Judge held that remedial works had already been necessary before these changes took effect, so while the legislation had a significant impact, it had not changed SGUK's position enough to meet the arguable case threshold.
Take-home points for landlords
- A full repairing covenant requiring the tenant to rebuild the whole premises, when necessary, paired with a narrow carve-out for insured risks, keeps latent defect risk on the tenant's side, even for life critical cladding failures.
- Post-Grenfell fire safety defects will not, on their own, unlock frustration. Courts treat this risk as foreseeable in the modern leasing market, particularly for long-term leases.
- Establishing frustration is difficult, particularly in the context of leases. Therefore, where a lease's risk allocation is clear and a tenant withholds rent on the basis that the lease has been frustrated, summary judgment can be a realistic route to the swift resolution.
Take-home points for tenants
- Discovering serious latent defects does not give a tenant an automatic route out of a lease. Repairing, insurance and warranty clauses should be reviewed before treating frustration as a viable strategy, as the doctrine is applied narrowly.
- Warranty and collateral warranty deeds from the original contractor and consultants, rather than the landlord, should be the primary recovery route for latent defects discovered after any defect liability period expires.
- Withholding rent unilaterally on an untested frustration argument is high risk. If the defence fails, a tenant could face a substantial arrears judgment on top of remediation costs.