There is no doubt that the continuing uncertainty surrounding Brexit is a source of significant frustration for many businesses. Countless UK business leaders have already expressed considerable disquiet about the negative impact that this uncertainty is having on their businesses and for the future of their commercial operations in the UK. But will Brexit, in whatever form it might take, frustrate a commercial lease so as to enable a party to an otherwise legally binding agreement to walk away from their obligations and treat the lease as being at an end?
This is the issue which the High Court had to address in the Canary Wharf (BP4) T1 Limited v. European Medicines Agency case. In delivering his judgment on 20 February 2019, Mr Justice Marcus Smith held that the withdrawal of the UK from the European Union will not constitute a “frustrating event” and that on Brexit the EMA will remain obligated to meet its contractual obligations under its lease. Whilst this decision is of particular importance for commercial landlords, it is undoubtedly of wider application to the business community generally. This case is, however, unlikely to be the last time this issue is raised.
What constitutes frustration?
Frustration is a concept within English contract law by which an agreement is brought to an end by operation of law as a result of a supervening event, not caused by either contracting party, which makes performance of the agreement impossible, illegal or so radically different from what was contemplated by the parties at the outset that it would unjust to insist on the strict performance of their contractual obligations. As noted by Lord Bingham in J Lauritzen AS v. Wijsmuller BV, The “Super Servant Two”, the effect of frustration is to “kill the contract and discharge the parties from further liability under it.” Given its potential to result in significant commercial uncertainty, the English courts have sought to restrict the circumstances in which a contract will be held to have been frustrated and, therefore, it is only likely to be successfully deployed in a very limited number of cases. However, as a common law doctrine, it is not immutable and has, and will continue, to evolve. As Mr Justice Smith points out in his judgment, there is no limited class of frustrating event. That said, the purpose of the doctrine is not to assist parties to escape from the normal commercial risks of making a bad deal.
The EMA is an agency of the European Union which formerly had its seat in London. As a consequence of Regulation (EU) 2018/1718, the EMA was required to relocate its headquarters from London to Amsterdam. This was alleged to have been done in response to the UK’s decision to give notice pursuant to Article 50 of its intention to withdraw from the European Union. The EMA argued that as a matter of EU law a European Union agency is obliged to have its headquarters located in a Member State, which the UK will cease to be on Brexit.
The issue for the EMA was its lease arrangements for its London headquarters. In 2014, the EMA entered into a 25-year lease for premises situated at Canary Wharf (the Lease). On 2 August 2017, the EMA sent a letter to the landlord 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."
The EMA further stated that:
"It would be unprecedented and incongruous for an EU body such as the [EMA] to be located in the UK and continue to pursue its mission in London after the UK has left the EU. Such circumstances were simply not contemplatable at the time of entering into the Lease."
In response, the landlord sought a declaration from the High Court that:
"… the withdrawal of the United Kingdom from the European Union and/or the relocation of the [EMA] (whether inside or outside of the United Kingdom) will not cause [the Lease] to be frustrated and that the [EMA] will continue to be bound by all of its covenants and obligations in the Lease …"
The EMA argued that Brexit will constitute a “frustrating event”, and so automatically bring the Lease to an end by operation of law, as it would result in:
- The EMA losing certain privileges and immunities guaranteed under the Treaty on the European Union and the Treaty on the Functioning of the European Union.
- The EMA (or any other agency of the European Union) being unable, as a matter of law, to occupy or make use of the leased premises.
- The EMA being unable to exercise its contractual rights under the Lease, including its rights to assign or transfer the Lease to a third party.
- The EMA lacking capacity (or vires) to meet its contractual obligations under the Lease, including the obligation to pay rent.
- The EMA being placed in a position of having to pay “double rent” for its London premises (which it cannot use) and its Amsterdam premises (which it can use), which would impede its “capacity, effectiveness and independence.”
In a carefully crafted judgment, Mr Justice Smith considered the arguments put forward on behalf of the EMA, but concluded that the Lease will not be frustrated on the withdrawal of the UK from the European Union. In the court’s view, Brexit will not constitute frustration by supervening illegality nor frustration of common purpose. Mr Justice Smith concluded by stating that the Lease “will not be discharged by frustration on the [UK’s] transition from Member State of the European Union to a third country nor does the EMA’s shift of headquarters from London to Amsterdam constitute a frustrating event.” As a consequence, the EMA will remain bound to comply with its obligations under the Lease for the remainder of the 25-year term, including the requirement on it to pay rent.
Where does this leave us?
This decision of the High Court will undoubtedly come as a welcome relief to many commercial landlords who are potentially facing the risk of tenants looking to exit leases as a consequence of Brexit. The decision is also of benefit to the wider business community as it gives a helpful indication as to how the court may treat similar attempts. That said, it is important to recognise that this judgment does not mean that Brexit could never be found to constitute a “frustrating event”. It is highly unlikely that this will be the last time this issue comes before the court, especially as the EMA still has the right to appeal the High Court’s decision. Unfortunately, this is one frustration which is unlikely to see a resolution any time soon.
How we can help
The Commercial Litigation team at Barlow Robbins has extensive experience of advising on complex, business critical disputes. If you would like to discuss any issues relating to your business, please do not hesitate to contact one of our team on 01483 543210 or alternatively email firstname.lastname@example.org