What affect does Brexit have on contracts entered into by housing associations? A 2019 case considered whether Brexit could frustrate a lease.
Canary Wharf (the Canary Wharf Companies) v European Medicines Agency (the EMA) was decided on 20 February 2019 and determined that the UK’s departure from the European Union would not enable the EMA to bring a lease to an end on the grounds of frustration.
What is frustration?
Frustration is a legal doctrine which provides that all parties to a contract may be released from their obligations under that contract where an unforeseen event which occurs after the formation of the contract:
- makes the performance of that contract physically or commercially impossible or illegal, or
- otherwise renders the obligations contained within a contract radically different from those envisaged by the parties when the contract was initially entered into
In such a situation, the contract is deemed to have been frustrated, is therefore terminated and the parties are released from all future liability to fulfil their obligations.
The courts determined in the 1981 case National Carriers Ltd v Panalpina (Northern) Ltd that the doctrine of frustration is applicable to leases in principle, but to date there are no reported cases in England where a lease has been held to have been frustrated.
A number of situations relating to the use of property have been considered previously in which frustration might arise. For example, a licence to use premises to witness a royal coronation procession was considered frustrated when the procession was cancelled. The courts have mentioned that the physical destruction or disappearance of leasehold premises may be sufficient to frustrate a lease.
However, the courts have consistently interpreted the doctrine of frustration very narrowly. The fact that the contract will be more expensive or inconvenient to comply with is not sufficient. For example, a 1916 case determined that a tenant being unable to access their leasehold premises (in this case, as a result of a wartime order) was not sufficient to frustrate a lease.
So what happened here?
The EMA, which is an agency of the EU, entered into 25 year underlease with the Canary Wharf Companies for ten floors within 25-30 Churchill Place in 2011 to house its headquarters. The lease contains provisions allowing the EMA to assign or sub-let the property, but contains no break clause. The lease does contain rent review provisions, and EMA’s future liabilities as tenant under the lease are estimated to amount to roughly £500 million.
The EMA was an important anchor tenant in the initial development at Canary Wharf, and the premises was adapted to the EMA’s specification. However, following the UK’s decision to exit the European Union, the EMA decided to relocate its headquarters from London to Amsterdam. The EMA sought to argue that Brexit had frustrated the lease, and that the parties should be released from their ongoing obligations under the lease.
The two primary arguments rested upon illegality, and common purpose. Firstly, the EMA argued that following Brexit it would not be entitled to be located at the Canary Wharf site under EU law, and therefore the payment of rent would constitute illegality. Secondly, the EMA argued that a common purpose of the two parties at the time of entry into the lease - to provide a permanent headquarters for EMA for the next 25 years - had been frustrated.
What was the court’s verdict?
Whilst the court acknowledged that Brexit amounted to a seismic event, it was not sufficient to frustrate the lease even in the event of a no-deal Brexit.
It was determined that the EMA retained the power to acquire and dispose of property, including property outside of the EU. As the lease contained provisions enabling the EMA to dispose of the property, there was no illegality in the EMA complying with the provisions of the lease. The EMA could either assign or sub-let the property with consent. Other factors were taken into consideration which were specific to the EMA being an agency of the EU including the ability to hold a headquarters in a non-EU member state, and the EU legislation requiring the move of the headquarters from London to Amsterdam.
Further, it was determined that there was no common purpose and indeed that the parties’ purposes were divergent. The court determined that the EMA was primarily focussed on obtaining bespoke premises with flexibility as to term and the lowest rent. The Canary Wharf Companies were seeking the highest rents. The presence of the provisions enabling the EMA to dispose of the property by way of assignment or sub-letting was also indicative that the parties had foreseen a scenario whereby the EMA would cease to be the occupational tenant. This further undermined the EMA’s assertion of a shared intention for the EMA to use the property as a headquarters for the full term of the lease.
However, notwithstanding the judgment of the High Court, the EMA has been granted permission to appeal the decision to the Court of Appeal, and it is considered likely that it will do so.
What does this mean for you?
This case provides comfort for housing associations that even in the event of a no-deal Brexit it is highly unlikely that a tenant will be in a position to be released from their obligations under a lease on the grounds of Brexit. If the High Court had found in favour of the EMA it is likely that this would have led to a huge number of claims of frustration, and this decision has provided a degree of calm to the UK property market amid the turbulent Brexit discussions.
However, as an appeal is anticipated this may not be the last word on the matter. Further, notwithstanding that the courts have set a very high threshold for a tenant to demonstrate that a lease has been frustrated, each case will be considered on its own unique facts and if a tenant raises the possibility of a claim to frustration of a lease we recommend you seek legal advice before responding.