In a highly-anticipated judgment regarding the enforceability of contracts post-Brexit, Mr Justice Marcus Smith found that Brexit, albeit a “seismic event”, was not sufficient to “frustrate” a lease and bring it to an end. Landlords can heave a sigh of relief as the court rejected the EMA’s argument that the UK’s departure from the European Union would result in the lease of its Canary Wharf headquarters being frustrated.
In August 2011, the European Medicines Agency (EMA) entered into an agreement for lease with the Canary Wharf Group (CW) for new headquarters to be constructed for it at 25-30 Churchill Place, Canary Wharf, London. Following construction of the premises the EMA and CW entered into the lease on 21 October 2014 for a term of 25 years expiring in June 2039. There was no break clause.
On 23 June 2016, the people of the UK voted to withdraw from the European Union, and the UK government triggered article 50 on 29 March 2017. As things stand, the UK will leave the EU on 29 March 2019.
The EMA is an EU-agency formed under European treaties. Faced with having an EU-agency headquartered in a “third country” (i.e. a non-EU Member state) post-Brexit, the EU passed a Regulation in November 2018 requiring the EMA to relocate its HQ from London to Amsterdam.
The EMA claimed that through the doctrine of “frustration” Brexit would cause the lease, including payment of over £1m per month in rent, to be brought to an end. CW sought a declaration from the court that the lease would continue. The case was expedited so that it could be heard before the UK’s exit date from the EU.
Unusually the case involved experts in modern history and politics to assist the court in determining whether at the time of the agreement for lease the parties might have realistically foreseen Brexit.
Doctrine of frustration
The doctrine of frustration if it applies brings an entire contract (in this case the lease) to an end. Frustration of a contract depends on whether a supervening event, or a fundamental change in circumstances, renders the performance of the contract impossible or so “radically different” from what was contemplated by the parties when the contract was made that it would be unjust to keep the parties to its performance.
Frustration cases are fact specific and involve exceptional circumstances. There has never been a case in which a court has held that a lease has been brought to an end through frustration.
In this case there was a novel twist in that it was also argued that by virtue of EU law there were fundamental changes to the EMA’s ability to comply with its lease covenants and that these changes were themselves frustrating events.
The court was being asked to look into the future at what would happen in the event that Brexit becomes a reality. The EMA argued that the lease was frustrated because on 29 March 2019 it would become illegal for it to be bound by its lease obligations. It also argued that the common purpose agreed on by it and CW at the time of the lease was now rendered radically different by Brexit.
Frustration by supervening illegality and ultra vires
The court assessed a variety of possible Brexit scenarios, and found that even a stark no-deal Brexit was not sufficient for the lease to be frustrated. Though it is understandable that the EU would prefer to have the EMA headquartered in an EU Member State post-Brexit, the court found there is nothing in law prohibiting its location in the UK. Likewise, the EMA is not prohibited legally from paying rent under the lease after Brexit. The EMA had also argued that they did not have power to become a “commercial landlord” by subletting the premises to mitigate their rent liability but again the judge rejected their argument.
The court also held that even if it were illegal for the EMA to fulfil its lease obligations post-Brexit, illegality under foreign law (here EU law) was not relevant to his decision.
Frustration of common purpose
The court also looked at whether there was a common purpose between the EMA and CW, in August 2011, which would be rendered radically different by Brexit. This required detailed analysis of the lease terms, the facts surrounding entry into the transaction and the parties’ assumptions and expectations, particularly around risk.
Most importantly for landlords, the terms of the lease were considered in great detail by the judge. As is typical in a sophisticated commercial lease, there were heavily negotiated alienation provisions which (among other things) included a right (subject to consent/conditions) for the EMA to assign or sub-let the whole premises. So, whilst the lease did not provide for Brexit, the lease did provide for the wholesale relocation (including involuntary departure) of the EMA away from the premises. Furthermore, the lack of break clause in the lease shows the EMA assumed the risk of change over the 25-year term. This was not surprising given the very generous incentive package provided by CW. It is clear from the judgment that the lease terms including the lack of a break clause had been fully considered by the EU prior to the EMA’s entry into the transaction.
All of these points considered, the court held that the case did not even come close to frustration of a common purpose. One point of interest is that the judge found that Brexit was not relevantly foreseeable for his purposes in 2011 when the agreement for lease was entered into. However he did find that it was foreseeable that for some reason over the term of the lease EMA might want to relocate and that was dealt with by the detailed alienation provisions. The judge also decided that there was no common purpose between the parties outside the terms of the lease. In fact as he points out their interests were divergent with the risk of relocation falling squarely on the EMA.
The court’s conclusion
The court found against the EMA at each stage. Brexit would not bring the lease to an end, through frustration or otherwise. Unless it can assign or sub-let its London headquarters, the EMA faces double-rent on both its London and Amsterdam offices and under English law there is no good reason for it not to honour its lease commitments.
The case provides welcome certainty, not just for landlords. If Brexit does not constitute a suitable supervening event even for the EMA as an EU agency, it is hard to envisage many situations where Brexit will result in a contract being frustrated, although as ever the key issue will be the words on the page. It remains the case that the doctrine of frustration is not lightly invoked, its application is rare and it will not save a party from what in hindsight turns out to be a “bad bargain”.
However, this is unlikely to be the end of the story. Unusually, Mr Justice Smith dispensed with the normal 21-day rule to appeal the decision, and has instead extended the deadline to 29 March 2019 (the current date of Brexit). The EMA may well appeal the decision and, given the high-profile nature of the case, a leapfrog appeal to the Supreme Court is a real possibility.