In a (perhaps unsurprising) recent decision in the case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency (the “EMA”), the High Court ruled that BREXIT would not amount to an event frustrating a lease.
In October 2014 (well before the 23 June 2016 referendum resulting in the UK’s decision to leave the EU), the EMA entered into a 25-year lease for its headquarters in Canary Wharf, with no option for the EMA to break the lease during its term. Soon after the UK’s decision to leave the EU, the EMA announced that its headquarters would be moving to Amsterdam, a move that took place in January of this year. Then, in August 2017, the EMA wrote to its landlords to notify them that it considered that BREXIT, if and when it occurred, would frustrate the lease and absolve the EMA of its future performance obligations.
The Legal Issues
Frustration occurs if an unforeseeable event occurs which renders performance of the contract impossible or illegal, or if the obligation to perform is transformed into something “radically different”. If frustration is made out, a contract will be discharged, releasing the parties from their future performance obligations and any liability for non-performance.
The key question for the High Court was, therefore, whether BREXIT would frustrate the lease and permit the EMA to escape its ongoing performance obligations, thereby saving approximately £500 million in rent.
The High Court’s Decision
The EMA argued that the lease was frustrated by (a) frustration of common purpose and (b) supervening illegality.
On supervening illegality, the Court held that: (i) supervening illegality was not recognised as an event that would frustrate a lease under English law; (ii) post-BREXIT, the EMA would still be in a position to observe the terms of the lease, even if it could not use the premises; and (iii) given the EMA’s status as a body of the EU, any supervening illegality would have been self-inflicted as a result of terms the EU had agreed to govern the EMA’s powers post-BREXIT.
On frustration of common purpose, the EMA argued that both parties to the lease had contemplated that the EMA needed a permanent headquarters for the next 25 years. If that could not be achieved, then the lease’s common purpose would be frustrated. The Court rejected this argument. The lease contained extensive alienation provisions that permitted the EMA to assign the lease or sublet the property, which are inconsistent with the EMA’s argument that the common purpose was for the EMA to be in permanent occupation for 25 years.
The Court’s judgment, although perhaps unsurprising, has potentially wide implications, as it gives an indication of how the Courts may deal with the question of whether BREXIT can frustrate other types of contracts. Given the Court’s rejection of the EMA’s frustration arguments, the judgment may well deter others from pursuing similar BREXIT-related frustration arguments in the future.
Parties may instead look to Force Majeure (“FM”) or Material Adverse Change (“MAC”) clauses in their contracts for relief from performance. However, whether or not these clauses will offer any assistance will depend on the contractual language used. Where a contract is in the process of being negotiated, parties could consider including express termination provisions or adapting their FM or MAC clauses to include (or, conversely, exclude) certain BREXIT-related events.