The UK High Court has ruled that the European Medicines Agency (“the EMA”) is tied to its obligations under its lease with its landlord, the Canary Wharf group, in relation to its commercial premises in London. The lease term is until 2039 but in a well-publicised move related to Brexit the EMA has moved its headquarters to Amsterdam. This left open the question of what it would do with its occupancy of a large and expensive office premises in Canary Wharf (the “Premises”). The EMA’s rental obligations under the lease run to several hundred million pounds.
Could Brexit frustrate the lease in question?
In making its case before the UK High Court, the EMA had argued that Brexit was a "frustrating event" for its commercial lease, which, in legal terms, meant that it should be allowed out of its contractual obligations pursuant to the lease by virtue of Brexit occuring. Mr Justice Smith disagreed with that argument and stated in his judgment that "The EMA remains obliged to perform its obligations under the lease." The Judge found that Brexit was not an event which frustrated the contractual obligations pursuant to the lease and couldn’t operate as a get out clause for EMA in relation to that lease
In particular, the EMA argued that both parties to the lease intended the Premises to be used throughout the term as the EMA’s headquarters and that Brexit would thwart this common purpose. Mr Justice Smith noted that the lease did in fact expressly provide, by means of a facility for subletting and assignment, for a situation arising where the EMA would cease to occupy the Premises and the reason as to why this was required was irrelevant.
In addressing an argument made by the EMA that its status as an agency of the European Union meant that it effectively had no choice but to move its headquarters from London as a result of Brexit, Mr Justice Smith further stated:
"It would seem a remarkable development for a contract involving an agency of the European Union to receive different treatment compared to a contract not involving such an agency,"
Could Brexit frustrate other contracts?
Whilst the case may be subject to appeal, it prompts the question as to whether differently formulated contractual clauses in a range of different commercial contracts could possibly be challenged by virtue of the EU's exit from the European Union on the basis that such an event entirely changes the basis upon which the parties entered into the contract in the first place. Such a scenario may arise particularly in the context of contractual arrangements between Irish contractual parties on the one hand and UK based contractual counter-parties on the other hand.
This question would not be confined to property related matters but could span across the full spectrum of commercial contractual relationships which are affected by the UK’s exit from the European Union, particularly if that occurs in a “no deal” scenario.
The decision of the UK High Court is not binding in this jurisdiction and any analysis of whether Brexit frustrates or avoids contractual obligations would have to be undertaken on a contract by contract basis. Contracts created within the last two years have frequently included "Brexit clauses" which aimed to deal with the scenario of the UK leaving the European Union. However, many such clauses may not have contemplated the exit occurring in a "no deal" scenario which has potentially grave commercial consequences for Anglo-Irish trade.
Alternative to frustration in property contracts?
In property contracts, it is difficult to see how the Irish Courts would form an alternative view to that of the UK High Court. In property leases, tenants have the ability to free themselves from their obligations by assigning or subletting the lease, subject to finding a suitable alternative tenant. Another option is for the parties to include a clause allowing one or both parties to terminate the contract by means of a break option. This usually comes at a cost and a tenant may find they pay a higher rent for this luxury. The most expensive option is of course the option of buying out your obligations. This almost certainly comes with the highest cost.
On the basis that the UK is due to exit the European Union in the near future, there can be little doubt but that contractual relationships will break down as a result of that event and it remains to be seen how that will play out in the Irish courts, particularly having regard to the fact that nearly every contract has its own distinctive characteristics and nuances.