UPDATED legal issue: enforceability of letting contracts

Occasionally, tenants or landlords will agree to a tenancy, either verbally or by signing a tenancy agreement and then change their mind. If they subsequently decide not to follow through with the letting, where does that leave the landlord or the tenant?

The answer is, a rental agreement is just like any other contract in law. It is binding and the courts will enforce it, whether or not the tenant moved in. So this is binding, on bother landlord and tenant, and neither party can back out of the tenancy until the contract fixed term, or in the case of a AST, at lease six months, has expired.

Verbal or written agreement

If this is purely a verbal agreement to create a tenancy, which is perfectly legal, then it leaves the landlord in a weak position as unless their are reliable witnesses, proving the parties intended to enter into a contractual arrangement where offer, acceptance and consideration is satisfied, will be difficult.

The written agreement should be drawn up and signed by both landlord and tenant. Section 52 of the Law of Property Act 1925 says that a fixed-term tenancy of more than three years must be signed as a deed. This simply means the wording at the end of agreement must make it clear this is being signed as a DEED, and the party’s signatures must be witnessed by an independent third party.

To enforce such a contract it’s important to show that the parties reached agreement on the essential terms of the letting or they can easily be “worked out” with some certainty. In other words there must be both “certainty of subject matter”, the property to be occupied for example, and “certainty of interest”, for example the details of the letting, its start date, length and rent payable.

So a standard written tenancy agreement offered by the landlord, even if the landlord had not signed it, will meet both of these legal tests and will be binding on the tenant and landlord. Neither party can then cancel it, though a landlord should ask itself: is it wise to force a tenant to a tenancy against its will?

The other issue which arises with a tenancy contract is: can a tenant or landlord repudiate it for other reasons, because they simply change their mind? Or because in the legal jargon, it is “frustrated”?

What is frustration in relation to contracts?

Frustration occurs when an unforeseen event occurs after a contract is agreed between the parties and entered into. Subsequently an unforeseen event, one which is not incorporated into the contract, and one which is outside the control of the parties, makes the contract either: physically or commercially impossible to perform or continue with.

It would not be enough that performance is made more costly or more difficult, the frustrating event or change in circumstance needs to be so fundamental to the agreement and completely beyond what was contemplated by the parties when they entered into the contract.

However, frustration of a contract under English law can be difficult to establish. If it can be established then one of the parties is able to walk away from the contract with no further ties, but complications arise when the contract contains a force majeure clause. This clause however must be specific and relevant to the particular ‘event’.

Before considering a challenge, a party to a contract should read the small print to determine if:

• there is a force majeure clause which covers the event
• if there is no force majeure clause, whether the event was truly unforeseeable
• if the event made the obligation to perform impossible, illegal or radically different
• If it would be impossible to continue under re-negotiated terms.

Any court, when considering a challenge of frustration, will consider the specific contract terms, the full background facts, the status and abilities of the parties and their ability to perform the contract in light of the event changes.

It is difficult to define what is truly unforeseeable, for example during the Covid pandemic it could have been argued that such an event would be foreseeable, but what may truly frustrate a contract could be the actions of government, bringing far-reaching restrictions which would render proceeding illegal.

Where money has been paid or pre-paid the 1943 Law Reform (Frustrated Contracts) Act allows for the recovery of sums under contracts when it can be shown that it has been frustrated.

Example Case

An example of a frustration case, one which failed, would be Gold Group Properties Limited v BDW Trading Limited (formerly known as Barratt Homes Limited) (2010)

In this case a dispute arose between the parties because of a change in the circumstances relating to an agreement for a substantial residential development where the properties were to be sold, on long leases.

Gold Group Properties, the claimant, was the freeholder and the defendant Barratt’s was to build out the development, sharing the sales revenue.

However, with a sharp fall in the property market it transpired that the minimum sale prices that had been agreed in the contract were no longer attainable. Barratt refused to begin the building works.

Gold Group applied to the court for summary judgment to be entered in their favour for damages, due to Barratt’s refusal to commence the building works.

In its defence, Barratt argued that the agreed minimum sale prices operated as conditions to the contract and therefore they were not obliged to start works and the contract was frustrated. Gold Group argued that the minimum sale prices were only included to guarantee Gold’s recovery on sales, not to protect Barratt, and that Barratt’s failure to develop the property amounted to breach of contract.

Did the sharp fall in projected sale proceeds frustrate the contract? That was the issue the judge had to decide.

The judge Coulson LJ found that the contract was not frustrated. First off, the change in the economic climate did not constitute an unforeseen event. The contract had been drafted with the risk of a possible fall in the market in mind. It provided a sufficient mechanism for the minimum sale prices to be renegotiated or determined by an expert in the absence of agreement between the parties.

The decision in this case shows that the court will not allow claims to succeed based on frustration due to changes in economic conditions alone. The minimum prices scheduled were held not to be a condition precedent to the carrying out by Barratt of the building works themselves.

There was no express term to that effect anywhere in the contract. The possibility that prices would drop was within the anticipation of the parties, and not having made provision for it, they undertook the associated commercial risk.

Conclusion

The parties to a contact, whether consciously or not, accept there is a risk from future events. Where a contract is frustrated, for example where a property becomes unfit for habitation through a catastrophic building failure, one party would be better off walking away from their obligations, whereas the other would be worse off if the deal is not made legally binding by the contract.

To achieve judgement, it is not just an unforeseen event that qualifies to frustrate a contract; a change of circumstances must be so dramatic that the new circumstances must be completely outside of the contemplation of the parties at the time the contract was made.

To achieve a just and equitable result between the parties “frustration” recognises that events, significant changes in circumstances, can and do interfere with contractual performance, warranting the cancellation of a contract.

So, anything that under normal circumstances could have been foreseen by, for example a tenant, who will usually have inspected the premises prior to agreement, will not be seen as frustration.

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