Is Brexit "frustrating"? The English High Court clarifies the application of frustration to lease contracts

Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch)

This English High Court decision upheld a lease held to the European Medicines Agency (EMA) for its London HQ and decided that Brexit would not 'frustrate' the contract. Whilst this will come as a relief to landlords fearing an exodus of their tenants to Europe, unfortunately this case does not expressly answer whether Brexit could constitute a frustrating event in other contracts and turned on its specific facts. It is clear, however, that only very rarely will the discharge of a lease be possible using the doctrine of frustration.

Facts

The EMA entered into a 25 year lease in 2014 worth £500m with the Canary Wharf Group (CWG) to secure premises to build its London headquarters. The lease was signed prior to the UK referendum in which the British people voted to leave the EU. The EMA is an agency of the EU and, following the vote, the EU passed a Regulation that relocated the EMA headquarters from London to Amsterdam. The EMA subsequently wrote to CWG stating that:

"having considered the position under English law, we have decided to inform you that if and when Brexit occurs, we will be treating that event as a frustration of the Lease."

CWF commenced proceedings in the English courts in order to have legal and commercial certainty on the issue.

The High Court Decision

The law of frustration of contract

'Frustration' is an English legal doctrine by which a contract may be discharged when something (of no fault of either party) occurs after formation of the contract which renders it physically or commercially impossible to fulfil. Equally, if the obligation to perform transforms into a 'radically different obligation' from that undertaken at the moment of entry into the contract, the contract will also be frustrated. If a contract is 'frustrated', the parties are released from their obligations under the agreement.

Supervening illegality

One of the examples of a frustrating event is when a change in law renders the performance of a contract illegal and this ground formed the basis of the primary argument by which EMA sought to show that the lease would be frustrated by Brexit. The EMA contended that it would no longer be lawful for it to pay rent to CWG following its relocation. This was based on a point of EU law but boiled down to the argument that if the EMA did not have the capacity to use the UK premises following Brexit, then it would not have capacity to pay rent for said premises.

Mr Justice Marcus Smith rejected this argument on the basis that, post Brexit, the EMA would still have legal capacity to deal with property in a non-EU country and so it could continue to perform its obligations under the lease.

Further, any legal effects of Brexit on the EMA could have been ameliorated by the EU but had not been, rendering any frustration self-induced: the 2018 Regulation could have made provision as to winding down the EMA in the UK, but did not do so.

Common purpose

The EMA's alternative argument was that the lease should be discharged due to frustration of a common purpose. This type of frustration occurs when an unforeseen event renders one party's obligations under a contract radically different (but not impossible) from that contemplated at the time it was entered into.

The Judge decided that, although the Lease was concluded in 2014, in reality the relevant date was the 2011 date because that was when the parties contractually agreed to enter into the lease. He then considered the nature of the Brexit, and the parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances and whether Brexit would result in the performance something "radically different".

The Judge found that the parties' "common purpose never amounted to a mutual contemplation that one of the purposes of the lease was 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 fact, the parties had divergent purposes: the landlord's purpose was long-term cash flow at the highest rate and a preparedness to allow the EMA to have a say in the building's configuration provided that this was not adverse to the landlord's interests, while the EMA's purpose was for bespoke premises, flexibility on the term and paying the lowest possible rent. The Court rejected EMA's argument because there was no common purpose outside the lease – "the parties approached the Agreements as counterparties, and they bargained hard – if amicably – to get what they wanted."

Conclusion

The Court dismissed the EMA's arguments that the lease had been/would be frustrated by Brexit and found in favour of CWG and upheld the lease.

Mr Justice Marcus Smith held that the "EMA chosen to enter into a long-term relationship, with long-term obligations. It played a role in framing those obligations: it could have opted for different premises, with a shorter lease; it could have negotiated a break and paid a (far) higher price and foregone the inducements it received. It did none of these things, but instead accepted provisions contemplating its departure from the Premises and providing for this case."

The Judge did concede that the EMA's financial hardship was unexpected given that it would be obliged to pay for premises it did not need but he also held that the EMA could assign or underlet the property (if the lease terms permitted it), providing a potential solution to protect its commercial interests.

Key Practice Points - what can be done with new or existing contracts?

Unfortunately, the judgment does not expressly answer whether Brexit could constitute a frustrating event and turned on its specific facts. It does however highlight the importance for tenants to carefully negotiate the terms of their lease and to factor in the possibility that the occurrence of a certain event, however unlikely, may affect their ability to receive the full benefit under a lease. These risks should be allocated within the terms of the agreement rather than seeking to rely on the courts to escape it.

Brexit clauses

In respect of new contracts (and likely any contracts concluded after the referendum), Brexit cannot be said to be an unforeseen possibility, notwithstanding that it may have a major impact upon the operation of a contract.

Parties should review their major contracts and consider a bespoke Brexit clause to address what should happen in the event of various forms of Brexit. To be effective, such clauses require a clear trigger event, such as:

1. the revocation of a specific law or regulation that is fundamental to the contract; or
2. a fluctuation in costs, prices or tariffs above a specified level.

Governing law and jurisdiction

In relation to governing law clauses, it is worth noting that any change on 'exit day' is unlikely. Rome I and Rome II, which is the EU legislation that gives effect to express choices of governing law, will remain in force. The UK government have also said that this will be incorporated into UK law on exit – therefore do express a choice of governing law in your contracts. It also goes without saying that there is no need to change English governing law clauses – English law will continue to exist.

The position is more complex when considering jurisdiction clauses. Exclusive jurisdiction clauses in favour of English courts should continue to be upheld both in English courts and courts of EU member states but there are potential issues with non-exclusive jurisdiction/ asymmetric jurisdiction clauses. In these cases it may be worth considering using process agents to ensure claims can be served when the UK is a 'third country'.

To read more articles related to this topic or to view other know-how material relevant to dispute resolution please visit our dedicated know-how portal Disputes+.