In most cases the Court is going to be reluctant to agree that Brexit will frustrate a contract, rather than merely leaving a party with a bad bargain. The fact that an EU institution that owed its presence in London entirely to the UK’s EU membership failed to do so highlights this.
The Claimants (“Canary Wharf”), the landlord and management company of commercial premises in London, entered into a 25-year lease agreement in 2014 with the Defendant (“EMA”), an agency of the EU, for premises that EMA used as its headquarters. In 2017, the UK notified the EU of its intention to withdraw, and exit day was scheduled for March 2019. Subsequently, the EU relocated the EMA headquarters to Amsterdam, and EMA stated that it would treat Brexit as frustration of the lease. Canary Wharf sought a declaration that the lease granted to the EMA would not be frustrated by the UK’s withdrawal from the EU.
The issues to be determined were whether:
- It would be illegal under EU law for EMA to use the premises, or even to sublet them, as the UK would no longer be an EU member state and EMA would lack the relevant legal capacity; and
- Brexit would defeat the common purpose of the lease, being the premises of the headquarters of EMA for 25 years, thus rendering the lease so radically different from what the parties had agreed to that it would be unjust to hold EMA to its bargain.
Marcus Smith J held that:
- Whilst EU law may be relevant to EMA’s capacity to enter into the relevant lease, it was only English law which was relevant to the consequences of the lack of capacity. Illegality under foreign law, when not the governing law of the contract, is only exceptionally relevant, and does not include the subsequent incapacity of one of the parties. English law had regard to whether performance of the contract would be unlawful according to the place of performance, not to the law of the place of incorporation. Furthermore, even if EU law were relevant, EMA had capacity as a matter of EU law to deal with immovable property in a third state, including to assign or sub-let in accordance with the lease. Any legal effects of Brexit on EMA could have been lessened by the EU, e.g. by making provisions to wind down EMA in the UK, but the EU elected not to do so, rendering the frustration self-induced. The lease was therefore not frustrated by illegality; and
- The lease was not frustrated by the failure of common purpose. There was some ‘common purpose’ to the lease, e.g. in the bespoke adaptation of the premises, but this was not sufficient to amount to a mutual contemplation that the purpose of the lease was to provide EMA headquarters for 25 years. Whilst Brexit was not contemplated by the parties as a cause for such relocation, the lease contained alienation provisions which envisaged EMA’s departure. Brexit adversely affected the EMA’s liability regime, but it did not render impossible its continued occupation of the premises, and the obligatory relocation to Amsterdam was essentially EMA’s involuntary departure, which had been expressly provided for in the lease. Brexit had therefore not rendered the lease so radically different that it had been frustrated. Marcus Smith J held that rather hindsight has shown that EMA had paid too high a price for the premises it acquired, in that it failed to build into the lease the flexibility as to term, that events have shown would have been in its commercial interests.
The court therefore granted the declaration in favour of the Claimants.
Stephenson Harwood comment
This highlights the narrow scope the doctrine of frustration, and how difficult parties to commercial contracts are likely to find it to succeed in arguing that Brexit has frustrated their contract.