Question

We are the tenant of commercial premises in central London which we have occupied for five years. The lease is for a term expiring in 2035. If the UK leaves the EU our business in the UK will no longer be viable and we are seeking to relocate the business to France. The lease permits assignment and underletting on terms, but in the current market it is proving difficult to find another tenant. Can we argue that the lease is frustrated in order to bring our obligations under it to an end?

Answer

On the current state of the law, an argument that your lease is frustrated by the UK’s decision to leave the EU will fail unless you are able to show that there was a common purpose that the lease should come to an end if you need to relocate the business.

Explanation

In order for a contract to be frustrated and treated at an end, and for the parties to it to be relieved of their liability for future performance, it must be proved that there is an event which:

  • occurs after the contract is formed;
  • is not due to the fault of either party to the contract;
  • is so fundamental that it goes to the root of the contract and renders it radically different from the contract the parties entered into;
  • was entirely beyond what either party contemplated when they entered into the contract; and
  • renders further performance of the contract either impossible or illegal.

Where the doctrine has succeeded is where one party to the contract dies or the subject matter of the contract is destroyed. A famous case (Krell v Henry [1903] 2 KB 740) concerned a contract for the hire of a room overlooking the procession route for the coronation of King Edward VII when the coronation was postponed due to the King’s ill health. The room could still be used but the purpose of the contract, ie a room with a view, could not be fulfilled and so the contract was frustrated. There have been no reported cases where a court has decided that a lease has been frustrated.

However, earlier this year the High Court heard the case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 Ch; [2019] EGLR 17, in which Canary Wharf sought a declaration that the withdrawal of the UK from the EU and/or the relocation of the European Medicines Agency (EMA) would not cause the lease between the parties to be frustrated.

The lease of premises at 25-30 Churchill Place, Canary Wharf, was granted in October 2014 for a term of 25 years. The premises were specifically designed and custom-made for the EMA’s use as its HQ pursuant to an agreement for lease in 2011. The lease was on standard terms, including an obligation to pay rent subject to review every five years, restrictions on alterations and detailed provisions on assignment and underletting. Following the UK referendum on EU membership, the EU decided to relocate the EMA to Amsterdam on the basis that its HQ should be in a member state. This meant that the EMA no longer had any need for the Canary Wharf premises. The lease did not contain a break clause and the remaining costs of the lease for the remainder of the term are more than £250m.

The court decided that while there was a common purpose between the parties that the premises would be developed specifically for the EMA, this did not extend to an agreement as to the circumstances in which the lease would come to an end. The parties did not hold a common purpose that there were circumstances – such as the EMA abandoning its headquarters or if the agency was no longer funded by the EU – which would lead to the termination of the lease.

Similarly, the court found that there was no frustration by supervening illegality. The EMA sought to argue that after the UK leaves the EU neither it nor any other EU agency could lawfully operate from the premises. However, there is no rule of law in support of this argument. The court decided that there is nothing to prevent the EU from having the headquarters of one of its agencies outside of the EU. It would not be unlawful for the EMA to pay rent or perform its obligations under the lease after Brexit. The fact of the EU regulation relocating the agency to Amsterdam meant that, even if the lease was frustrated, this was self-induced on the part of the EMA.

One of the questions the court had to determine was the extent to which Brexit was foreseeable when the EMA entered into the agreement for lease in 2011. It determined that while Brexit was a theoretical possibility in 2011, the UK’s withdrawal from the EU was not foreseeable. However, it was foreseeable that over the length of the lease, the EMA may have to leave involuntarily and this was catered for by the alienation provisions contained in the lease. The EMA had been taking steps to assign or underlet the premises, which the court interpreted as the EMA acting commercially in all the circumstances.

The EMA has been granted permission to appeal to the Court of Appeal and the appeal will be heard by mid-March 2020. However, as the law currently stands, unless your lease caters for the need to relocate your business, you are unlikely to be able to argue that the lease has been frustrated by common purpose.

You are not likely to be in a position to argue that continuing to perform your lease obligations following the relocation of your business creates any illegality or that your decision to relocate is not a voluntary decision which will defeat the doctrine of frustration. The fact that the lease contains provisions allowing you to assign or underlet will also carry significant weight with a court. Your interests are best served by continuing to seek an assignee or undertenant to take over your lease responsibilities.

The article was first published in EG on 8 May 2019.