The High Court has found that a lease was not brought to an end due to Brexit. Although the case related to a lease, it is a useful indicator of how Brexit may affect commercial contracts generally.
Canary Wharf (BP4) T1 Ltd and others v European Medicines Agency concerned the European Medicines Agency (EMA), which is currently headquartered in London. The EMA’s lease expires in 2039 and does not contain a break clause allowing the EMA to leave the office premises before then.
European Union (EU) law requires the EMA to be headquartered in an EU Member State. This means the EMA will need to relocate to another EU Member State when the UK leaves the EU. To this end, the EU has legislated to relocate the EMA’s headquarters (HQ) to Amsterdam by 16 November 2019.
In 2017, the EMA notified its landlord that, when the UK leaves the EU, it will consider its lease “frustrated”. Under the English law concept of frustration, a person can treat a contract as coming to an end if, due to some unforeseeable event, it becomes impossible to fulfil the contract, or that person’s obligations are transformed into something radically different from what was originally anticipated.
The EMA argued that the combination of Brexit and EU law meant that it was no longer permitted to lease and pay rent for an HQ in the UK. For this reason, it said, it would no longer be able to perform its obligations under the lease. It also argued that the common purpose of the lease had been to provide an HQ for EMA, and that this purpose would be frustrated by Brexit.
If the lease were to be frustrated, the EMA would be able to walk away from its London premises and stop paying rent.
What did the court say?
The court found that Brexit would not frustrate the lease. In particular, it said the following:
- Although the EMA could no longer be headquartered in the UK, it was still allowed to lease, dispose of and sub-let property in countries outside the EU. Brexit might prevent the EMA from having its HQ in the UK, but it did not prevent it from leasing an office in London.
- The common purpose of the parties was never to provide the London office as the EMA’s permanent HQ. This was particularly the case, given the lease did not allow the EMA to break if it had to move its HQ.
- When the parties entered into their agreement for lease in 2011, Brexit was not foreseeable. However, the EMA had entered into a long-term contract with no ability to terminate when it was foreseeable that some event outside the EMA’s control could require it to leave the UK.
- The lease allowed the EMA to sub-let or assign the office space, which effectively gave it a remedy if it had to relocate from the UK.
It is always important not to generalise too much from cases involving frustration. They are usually very fact-specific and depend to a large extent on the individual motivations of the parties.
However, some of the comments in this case may be useful to businesses considering the effect of Brexit on their longer-term commercial contracts.
In particular, the court noted that, although Brexit was foreseeable as a “theoretical possibility” in 2011, for all relevant purposes it was not foreseeable. There had been turbulent moments between the UK and the EU in the years leading to 2011, and political parties such as UKIP had been gaining traction. However, the terms of debate concentrated on the UK’s continued membership of the EU, not its withdrawal.
This is important. If the courts follow this approach in other cases, it means that Brexit will, in principle, be capable of leading to a contract being frustrated.
But this does not mean contract parties are simply free to walk away from their agreements and cite Brexit as the reason:
- First, the party must show that Brexit was not foreseeable when the contract was entered into. In this case, the court said that Brexit was not foreseeable in 2011. But it is not clear when Brexit did become foreseeable. Could this be sometime in the morning of 24 June 2016, when the result of the EU referendum became clear? Or could it be earlier – say 27 May 2015, when the legislation for the referendum was first announced, or even 22 January 2013, when then-Prime Minister David Cameron announced that, if the Conservatives won the next General Election, they would hold a referendum on EU membership? In reality, it’s unlikely the courts will fix a single date, but the later in time a contract is entered into, the less likely it is that a party will be able to abandon it on basis of Brexit.
- Even if the parties to a contract did not foresee Brexit when they entered into the contract, Brexit must still render the contract impossible or radically change a party’s obligations. This may be difficult to demonstrate. The mere fact that a contract becomes more difficult or costly to perform following Brexit does not mean it will be frustrated. For example, a distributor might find that the cost of obtaining or supplying those goods rises substantially – perhaps even prohibitively – following Brexit, but this alone will not allow the distributor to walk away.