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High Court holds Brexit does not frustrate commercial lease contract

Piece in form of UK borders torn out from the flag of the European Union. United Kingdom withdrawal from the European Union. Brexit concept Print publication

28/02/2019

The High Court has held, in the high profile litigation between the owner of Canary Wharf and its anchor tenant, the European Medicines Agency, that the lease will not be terminated by frustration as a result of the UK’s departure from the EU. The EMA therefore remains bound to perform its contractual obligations for the remainder of the 25 year, £13 million rental per annum, lease.

Why is this case important?

Canary Wharf v EMA [1] is the first high profile case to consider some of the commercial ramifications of Brexit.  Many contracting parties – not just commercial landlords and tenants – have been awaiting the High Court’s judgment because it has significant implications for the ongoing enforceability of a wide range of leases and commercial contracts.  The case considered whether the UK’s departure from the EU would frustrate (and therefore effectively terminate) the EMA’s lease at Canary Wharf.

Had the High Court found for the EMA, countless leases and commercial contracts throughout the UK and even internationally would also have been immediately vulnerable, as other parties may be tempted to seek to terminate arrangements which Brexit (or economic difficulties or uncertainty associated with it) rendered unfavourable.

Whilst the High Court’s decision that Brexit does not frustrate the EMA’s lease is likely to stem the flood of such cases in the short term, that is unlikely to be the end of the story. Walker Morris’ Real Estate Litigation and Commercial Dispute Resolution partners explain.

The commercial context and legal issues

The EMA, an agency of the EU, argued that certain privileges afforded to it under European law which are necessary to its legal functioning and independence will be diminished on Brexit – hence its decision to relocate to Amsterdam. In an attempt to escape ongoing liability in relation to its premises at Canary Wharf in London, the EMA contended that Brexit would amount to a frustration of its lease.

The doctrine of frustration provides that, on the occurrence of a ‘frustrating event’, parties are no longer bound to perform their obligations and a contract is therefore effectively terminated. A frustrating event is one which:

  • occurs after the contract has been formed;
  • is so fundamental as to go to the root of the contract;
  • is neither party’s fault; and
  • renders further performance impossible, illegal or makes it radically different from that which was contemplated by the parties at the time the contract was made.

Frustration is an option which commercial clients often wish to consider when contracts do not turn out as they had hoped. However the doctrine operates within very narrow confines as English law will not lightly relieve parties of their contractual obligations.

In particular, frustration is not available where the contract has otherwise made express provision for the consequences of the occurrence of the event in question; where an alternative means of performing the contract is possible; or if the contract merely becomes more expensive or less commercially viable to perform.

It is especially difficult to successfully argue for frustration in the case of a lease, because a lease affords a tenant the benefit of the demised premises whether or not the tenant wishes to make use of it, plus there usually remains the possibility of the tenant assigning or subletting.

What did the High Court decide?

In a very careful and comprehensive judgment, the High Court concluded that Brexit will not frustrate the EMA’s lease in this case. Some of the reasons for that decision are, however, highly case- and fact- specific.

For example, the EMA argued that Brexit would result in supervening illegality under EU law undermining its capacity to operate, or to derive any benefit, from the premises. The High Court stated that, even if that were the case, it was not a matter with which the English law of frustration is concerned.

The court went even further to state that, if it were wrong on that point, nevertheless the legal effects on the EMA of the UK’s departure could have been, but were not, ameliorated by the EU (effectively, the EMA’s principal). As such, the court acknowledged that there may have been frustration after all, but that, if so, it was self-induced and could not therefore operate to terminate the lease contract.

The High Court considered the EMA’s argument that there was a common purpose contemplated at the time the contract was made between Canary Wharf wanting to attract an anchor tenant and EMA wanting to sculpt the premises particularly to its purposes. However the court concluded that that did not amount to a mutual contemplation that the lease would provide a permanent headquarters for the EMA for the next 25 years such that, if that could not be achieved, the common purpose had failed and the lease would be frustrated.

Although the lease was dated 21 October 2014, the parties had become contractually obliged to enter into it on 6 August 2011. The High Court decided that, as at that date, despite the existence of Article 50 of the Treaty of the European Union, it was not “relevantly foreseeable[2] that the UK would depart the EU.  The court based that finding on the fact that the bulk of any debate on turbulence in the relationship centred on the terms of the UK’s ongoing membership, rather than on a potential departure.

Nevertheless, the court also noted that, whilst no inference could be drawn from the parties’ failure to cater for the possibility of Brexit in this particular case because of the time at which the parties became contractually bound, the same might not be the case for any contractual arrangements entered into in the last two or so years.

As to whether Brexit renders the EMA’s ongoing performance of its lease obligations radically different from that which was contemplated in 2011, the High Court recognised that Brexit is an event which the parties did not anticipate per se, however it concluded that the parties did contemplate and cater for the involuntary departure of the EMA from the premises due to circumstances beyond its control – hence the alienation provisions.

WM Comment

The High Court’s overall finding in favour of the landlord will no doubt stem the flood of lease and commercial contract frustration claims that would most likely have flowed from a decision the other way.

The case also emphasises how difficult it can be to succeed with a frustration claim under English law (when even a claim by an EU-entity tenant fails despite the court describing Brexit as a “seismic” event) and demonstrates the very wide range of factors that the court can take into account when assessing a claim against the high bar required.

However, there are a number of aspects of the decision which do leave the gates open for future claims. In particular, the judgment confirms that Brexit was not relevantly foreseeable prior to 2016 or thereabouts and it acknowledges the principle that, in factual and contractual scenarios other than those in this particular case, it might well be possible for Brexit to amount to a frustrating event.

The EMA has indicated that it may seek clarification of some aspects of EU law that are relevant to this case at the Court of Justice of the European Union. For the reasons mentioned above, it is also unlikely that this will be the last Brexit frustration claim to come.  Either way, Walker Morris will continue to monitor and report on legal and commercial consequences arising from Brexit over the coming crucial weeks and months.

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[1] [2019] EWHC 335 (Ch)
[2] Ibid para 216

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