Frustration of a lease after Brexit
The United Kingdom has long accommodated the headquarters of many companies, government agencies and organisations; in light of the bold Brexit vote, many now seek to relocate to EU states.
The case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency  EWHC 335 (Ch) has dealt with the prominent issue of whether a lease can be frustrated as a result of Brexit.
What is Frustration?
In limited cases, the courts may exercise their power to render a contract frustrated. In effect this will mean that the contract will no longer be binding on either party. Claims relying on this doctrine are rarely successful as the courts impose a high threshold when considering cases.
The approach adopted by the courts in determining whether a contract has been frustrated is to take into account all circumstances and factors of each case. It must be established that there has been a change in circumstance after the contract has been entered into; that the event has occurred through no fault of either party; as a result of which the contract will either be impossible to perform or deprives it from its commercial purpose. It must also be evinced that the event which is deemed to have rendered the contact frustrated, was unforeseeable in all circumstances.
Facts of the Case
The Claimants (Canary Wharf Ltd), who are the landlords of a commercial premises situated in London, entered into an agreement for a lease with Defendants (European Medicine Agency) in 2011. In October 2014 the parties entered a 25 year lease (the Lease).
The key provisions of the agreement which proved to be cumbersome for the Defendant were the absence of a break clause, and the fact that the assignment and sub-letting clauses heavily protected the Claimant’s interest. Further, in accordance with English law, in 2011 the Defendant’s solicitors provided a letter asserting that the Defendant had the power and legal capacity to enter into the Lease for the duration of what could be considered an onerous term.
As a result of Brexit, the EU ordered the Defendant to relocate its headquarters to Amsterdam under Regulation (EU) 2018/1718 (the Regulation). As Brexit was not a prominent issue at the time the lease was entered into, "Brexit Clauses” were not considered. As such, there was nothing in the Lease to reflect the occurrence of such an incident.
In August 2017 the Defendant notified the Claimant “if and when Brexit occurs, we will be treating that event as a frustration of the Lease”. The issue here was whether Brexit would have such effect that the Lease would be rendered frustrated.
The Defendant sought to rely on two arguments to establish that the Lease had been frustrated as a result of Brexit. Firstly, the impact of Brexit would render the Lease frustrated by reason of supervening illegality. Secondly, the Defendant sought to rely on the doctrine of common purpose.
The Defendant further reasoned that as a result of the Regulation, there was a legal obligation that the Defendant relocates its headquarters to Amsterdam. Given that the UK will become a “third country” following Brexit, then it would be illegal to maintain the headquarters in the UK. Additionally, it was asserted that it would be ultra vires for the Defendant to continue to make rental payments without occupying the property and that it would also be beyond the Defendant's legal capacity to assign or sublet the premises.
Mr Justice Smith took the view that the departure of the UK from the EU does not render the Lease frustrated.
In addressing the Defendant’s first argument, that the UK’s departure from the EU would render the Lease frustrated by reason of supervening illegality, it was held: "[T]he EMA's case on supervening illegality must fail ... [T]he EMA has the capacity, post the withdrawal of the [UK] from the [EU], to continue to use and/or dispose of the premises and...it continues to have the capacity to pay rent (and perform its other continuing obligations) under the lease…Even if the EMA did lack the capacity to continue performance by reason of supervening illegality under [EU] law, this is not a matter that the English law of frustration will have regard to."
The judge proceeded to address whether the UK's departure from the EU rendered the performance of the contract 'radically different', which dealt with the second argument, the 'common purpose' test. He found that, although the Claimant made alterations to its original plans for the building to accommodate the Defendant, it cannot be established that the Lease was created to "provide a permanent headquarters for the EMA for the next 25 years and that if that could not be achieved, the common purpose of the lease had failed".
In determining whether Brexit was "relevantly foreseeable" it was held that when the parties agreed the lease in 2011, the Defendant had "assumed the risk of change" by entering the Lease which is of a 25-year term. Further the Defendant "quite consciously entered into the lease without a break clause"; and engaged in negotiations with regarding alienation provisions, thus defining the circumstances in which it could vacate the premises.
On this issue, the judgment proceeded to explain "By this, I do not mean to say that the [UK's] withdrawal from the [EU] was in any way anticipated or in the contemplation of the parties, and that therefore the risk of the consequences of the [UK's] withdrawal was to be allocated to the EMA... However, I do consider that it was foreseeable that over this long period of time, there might be some development that would require the EMA involuntarily to have to leave the premises due to circumstances beyond its control."
As with all property contracts, the terms of a lease are heavily dependent on each party’s bargaining power. In this case, the Lease was clearly more onerous on the Defendant. However, these were pertinent considerations that the Defendant ought to have had at the time of entering into the Lease.
From a socio-economic perspective, any other outcome could have been proven to be catastrophic for the UK’s business relations. The case is currently being appealed. Should the appeal succeed, then the Courts must be prepared for a flood of organisations, looking to use their get out jail free card.
If you have concerns about your business and wish to speak about your lease and the impact Brexit will have on that lease; contact Dalia Jamil on 0203 114 1134, alternatively email her on email@example.com.
Duncan Lewis Civil Litigation Solicitors
Duncan Lewis is one of the leading solicitors in England and Wales offering expert litigation and alternative dispute resolution services. Duncan Lewis has acknowledged expertise in advising corporate clients on litigation matters – as well as advising private individuals in cases where litigation might be an option.
If you require further assistance on this subject or any other property related litigation matter, please contact our litigation team on 033 3772 0409.