Can Brexit frustrate a lease?

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Commercial Property:

While Brexit may be
frustrating for many people, whether it can frustrate a lease has recently been
reviewed by the High Court. The European Medicines Agency (EMA) is the European
Union (EU) agency responsible for the scientific evaluation, supervision and
safety monitoring of medicines in the EU. In 2014 it took out a 25 year lease
in Canary Wharf to use as its headquarters. Following the decision to leave the
EU, the EMA wrote to its landlord to say that “if and when Brexit occurs, we will be treating that event as a
frustration of the Lease.�

The EMA’s stated reason for
wanting to end their lease was because it would be ‘inconceivable for’ an EU
agency to be based in a non-EU member state, hence the need to relocate.
Clearly the EMA did not want to have to pay rent for its new offices as well as
a London office that it felt it could no longer use.

If the EMA could prove that
Brexit was a frustrating event, the lease would terminate and in doing so release
the EMA from the obligation to pay rent for the remaining 20 years. The
landlord disagreed that Brexit was a (legally) frustrating event and sought a
declaration from the courts to protect its significant rental income.

So what is frustration?

The legal concept of
frustration is where the law recognises that sometimes things happen, with no
fault attributed to either party, that stop an agreement from being performed
or that would render the agreement radically different. For example, when World
War II broke out a contract to deliver goods manufactured in Leeds to Poland
became frustrated because, after the contract had been formed, it became
illegal to sell goods into Poland. Likewise when the coronation of King Edward
VII was delayed because he was ill, the purchase of tickets to watch the
coronation on that day was frustrated because there was no coronation. Frustration
immediately brings a contract to an end without creating liability for either
party.

The EMA’s arguments

The EMA argued that either
after Brexit it would be illegal for them to perform its obligations under the
lease, or that there was a common purpose to provide the EMA with a European
headquarters.

Illegality

The Court found that English
law did not prevent the EMA from performing its obligations under the lease. It
also said that it thought that if European law made it illegal for the EMA to
use the property or perform its lease obligations that was an issue for EU law
and was “not a matter for the English law of frustration�.

In this particular instance,
the Court went on to say that because the EMA is an EU agency, then even if it
was wrong and it should take issues of EU illegality into account, these problems
would be self-inflicted by the EU by not passing regulations to deal with the
effects of Brexit. Since frustration can’t be used where the supervening event
is caused by one of the parties that would have to be taken into consideration
by the Court.

Common purpose

The Court disagreed that there
was a common purpose for the lease. The EMA wanted to use the space on the most
flexible terms it could get, and for the lowest rent, while the landlord wanted
exactly the opposite: maximum rent for the longest term. On the basis that
there was no common purpose, this couldn’t work as a basis for frustration.

The Judge said that “… the
fact is that hindsight has shown that EMA has paid too high a price for the
Premises it acquired, in that it failed to build into the lease the flexibility
as to term that events have shown would have been in its commercial interests.�
However, frustration cannot be used solely to get out of a bad bargain.

Summary

While this is welcome news for
landlords concerned about tenants seeking to use Brexit to exit property
contracts or leases, the EMA has recently been granted leave to appeal the
decision.  Property lawyers and landlords
will be keeping watch to see what the Court of Appeal has to say if the EMA
pursues an appeal.

• Canary
  Wharf (BP4) T1 Ltd & Ors v European Medicines Agency [2019] EWHC 335 (Ch)
  (20 February 2019)

Author

Michael Goldfitch is a Commercial Property Lawyer with law firm Wright Hassall

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