Key takeaways

• The triggering event of a rent abatement clause in commercial leases heavily depends on the precise wordings. The Court applies the normal principles of contractual interpretation in construing the precise scope of an abatement clause at the time when the commercial leases are entered into, but not at the time of judgment.
• While parties to commercial leases are used to standard terms like abatement of rent and force majeure, it may be worthwhile to review whether the scope of these terms would adequately address their business needs or risks in light of the rapid changes and unpredictability in the world. 

In more detail

The Court of Appeal recently handed down a judgment regarding a tenant's appeal against the lower Court's judgment in favor of the landlord's claim for outstanding arrears of rent, damages and other charges payable under the relevant commercial leases. 

At the lower Court, the tenant put forward, among others, the following arguments in its defence for the landlord's claim:

• The extraordinary circumstances, including the COVID-19 pandemic and the associated travel restrictions and public health measures ("Extraordinary Circumstances"), engaged the abatement clause under the commercial leases, pursuant to which the rent should abate or cease to be payable.¹
• The Extraordinary Circumstances caused the common purpose of commercial leases to be frustrated, such that the parties should have been released from their contractual obligations. 

The lower Court rejected the tenant's defence and held, among others, that "a common thread running through" the abatement clause is that the triggering event is something that affects the premises themselves, impinging on their use and/or accessibility. This was not the case with the Extraordinary Circumstances, and therefore, the lower Court found that the abatement clause had not been triggered. In respect of the frustration argument, the lower Court found that the tenant's real complaint was of profitability, which is not within the obligation of the landlord. Accordingly, the issue of frustration was not engaged. 

The tenant appealed and argued that the lower Court has erred in law in the interpretation of the subject abatement clause and also on the issue of frustration.   

The Court of Appeal reiterated the fundamental principles in the interpretation of contractual clauses, namely: (i) to identify what the parties meant from the language of the provisions through the eyes of a reasonable reader; and (ii) to consider the commercial common sense of the subject contractual term perceived by the parties, or by reasonable people in the position of the parties, as at the date that the contract was made, as opposed to retrospective consideration at the time of the judgment. 

With the above principles in mind, the Court of Appeal held that the focus on the interpretation of the abatement clause in question should be on the effect of the actual instance on the occupation of the premises. Given that the Extraordinary Circumstances did not affect the physical occupation of the premises or the tenant's use as retail space, the appellant Court found that the business interruption during the pandemic did not invoke the subject abatement clause. 

With regard to the issue of frustration, the Court of Appeal agreed with the lower Court's findings and held that the common commercial purpose of a contract can be inferred from the express terms of the agreement. Since one of the subject commercial leases did not cover any luxury brand, and the other one did not include any provision for turnover rent, the Court of Appeal was not convinced by the common commercial purpose claimed by the tenant (i.e., operating luxury retail stores). Accordingly, the commercial leases in question were not frustrated as the landlord continued to let the premises for the tenant's occupation. 

In the circumstances, the Court of Appeal affirmed the findings of the lower Court and dismissed the tenant's appeal. 

Implications of the Court of Appeal's judgment

The Court of Appeal judgment raised a real question as to the sufficiency of the standard contractual terms that used to be adopted pre-COVID-19 in commercial leases. In light of the fast-changing world, parties are encouraged to revisit their contracts generally to ensure that their rights and obligations, and the distribution of risks and benefits, are sufficiently reflected in contracts.

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¹ The abatement clause provides as follows: 

"If the Premises or any part thereof shall be rendered unfit for use or inaccessible by fire, typhoon, act of God, force majeure or any other cause beyond the control of the Landlord (other than on account of the Tenant's act neglect or default) and the policy or policies of insurance effected by the Landlord shall not have been vitiated or payment of the policy monies refused in whole or in part in consequence of any act or default of the Tenant or if the Premises shall be condemned as a dangerous structure or a demolition order or closing order shall become operative in respect of the Premises then the Rent or a fair proportion thereof according to the nature and extent of the damage sustained or order made (the determination of which by the Landlord shall be final and conclusive and be binding on the Tenant) shall, after the expiration of the then current month, abate and cease to be payable until the same shall have been again rendered fit for use and accessible …"

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