On 21 October 2014, the EMA entered into an underlease with CW dated 21 October 2014 of part of 25-30 Churchill Place, for a term of 25 years. The Parties had committed to the deal in August 2011. On 2 August 2017, the EMA wrote to CW 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.”
CW then sought a declaration from the court that the EMA would continue to be bound by the provisions of the Lease, come what may, after Brexit. The EMA said that as a result of Brexit, given that it was an agency of the EU, it had to relocate away from the UK. Brexit had caused the Lease to be frustrated because it would trigger a number of legal changes relating to the EMA’s ability to continue with the Lease. Mr Justice Smith referred to five possible withdrawal options but considered the dispute on the basis of a “no-deal” Brexit, because this was the most likely approach to produce an answer that would be helpful to the parties.
If performance of a contract becomes more difficult or even impossible for the party, then the general rule is that the party who fails to perform is liable in damages. Frustration is an exception. Lord Radcliffe in the House of Lords, in the 1956 case of Davis Contractors v Fareham UDC, said:
“Frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract ... It was not this that I promised to do.”
This is a very difficult test to fulfil under English law, with Mr Justice Smith noting that: “Since the effect of frustration is to kill the contract and discharge the parties from further liability under it, the doctrine must not be lightly invoked and must be kept within very narrow limits.”
In terms of the parties’ expectations as to risk at the time of the conclusion of the Agreement, for frustration what mattered was whether the supervening event and the parties’ reasonable and objectively ascertainable calculations rendered the parties’ performance something “radically different”. Here, the Judge agreed that the EMA’s position was materially and adversely affected by Brexit. Further, being an EU agency, it could easily be seen that the EMA might not want to be located in the UK. However, the EMA’s capacity to deal with property remained. The EMA still had capacity to continue to use the building and perform its obligations (pay rent) under the Lease.
The EMA was obliged to move its headquarters from London to Amsterdam. However, whilst the move was readily understandable given the desirability of having the EMA located within the territory of a Member State of the European Union, it was not a legal necessity.
The foreseeability of the frustrating event was relevant only insofar as it informed the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk. As at 5 August 2011, the withdrawal of the UK from the EU was foreseeable as a theoretical possibility but was not relevantly foreseeable, but the Judge could draw no inference from the parties’ failure to cater for this specific possibility in the Lease. It would have been different if it had been drawn up in the past two years or so.
The lease was 25 years’ long. It was foreseeable that over this long period of time, there might be some development that would require the EMA involuntarily to have to leave the premises due to circumstances beyond its control. However, this had been catered for in the alienation provisions, provisions which govern a tenant’s ability to sublet or share occupation of the Premises.
Mr Justice Smith accepted that the withdrawal of the UK from the EU was a “seismic event”, and was not within contemplation of either party at the time the agreement was concluded. However, the involuntary departure of the EMA, due to circumstances beyond it’s (or, indeed, the EU’s) control was something which the Lease expressly provided for. The provisions in the Lease drew no distinction between the reasons why the EMA might abandon its headquarters at the Premises. The provisions simply dealt with the fact.
This led the Judge to conclude that not only did the Lease contain provisions catering for the event that occurred – the involuntary departure of the EMA from its headquarters due to Brexit – but also that the operation of these provisions was consistent with the overall intention of the Lease. There was therefore no need to mitigate the rigour of the common law’s insistence on literal performance of absolute promises – i.e. the terms of the Lease.
The Judge accepted that the EMA was suffering a financial hardship that was unexpected. The removal of the EMA from London was not a matter it desired but was caused by an event outside its control. If the Lease was not frustrated, the EMA would be obliged to pay rent – if it could not assign or sublet – and would, for the duration of the Lease, be obliged to pay for Premises it did not need. But the EMA chose 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, and so the Lease had not been frustrated.