European Union: Brexit Might Be Frustrating, Just Not For Leases

It was the result that the property world had been waiting for: the recent High Court judgment on the enforceability of a lease post-Brexit held that Brexit will not be a frustrating event. The European Medicines Agency was not entitled to terminate its lease and will remain bound by its terms after the UK leaves the EU.

We consider the main takeaways from this case and the points that landlords, as well as parties to other commercial contracts, should take note of.

Permission to appeal has been granted, so it remains to be seen whether the Court of Appeal will agree.

Although the same probably can't be said for Parliament, the Courts have taken decisive action when it comes to Brexit and have decided that Brexit will not frustrate a lease contract.

The property world will not be alone in letting out a sigh of relief at this result, since a ruling the other way could potentially have opened the floodgates to wide ranging claims that contracts will be frustrated by Brexit. This judgment gives landlords some much needed comfort that their leases will be ongoing after Brexit, even if they cannot be so certain of much else about the post-Brexit world.

This case was brought by the Canary Wharf Group, landlord to the European Medicines Agency ("EMA"), in circumstances where the tenant had alleged that it should be released from all liability under its lease of the property at 25-30 Churchill Place, Canary Wharf on the basis that if and when the UK leaves the European Union, that would be a frustrating event. If that had been the case, then the lease would end upon Brexit taking place, and both landlord and tenant would be relieved of their future obligations, including the rental liability thought to be worth around £500 million.

Frustration is a relatively rarely applied doctrine, used when a supervening event, through no fault of either party, means that the contract they entered into cannot be performed as intended. When successfully invoked, this doctrine means that each side is released from their ongoing obligations under the contract that has been frustrated.

In his judgment, Mr Justice Marcus Smith reminded us that the best test for whether a contract has been frustrated is whether a "supervening event" occurs after the original contract was entered into which would render the performance of the original bargain that was struck "radically different" from that envisaged (objectively determined) at the time of the contract.

EMA made a twofold argument: first, that Brexit would frustrate the common purpose of the parties and secondly, that it constitutes a "supervening illegality" meaning that it would be illegal after Brexit for EMA to continue to occupy the property and perform its obligations under the lease.

This second argument is of limited wider significance, since it specifically concerned the EU rules governing the EMA's ability to occupy property and pay rent, however the first argument had the scope for much wider implications. If EMA had succeeded on this point, it could have set a precedent for the fact that leases could have been entered into implicitly on the basis that the UK remains a part of the EU.

The Judge recognised that one of the difficulties in this case is that we cannot yet say for certain what will happen on 29 March 2019. This was dealt with by considering five different possible outcomes:

  1. The UK leaves the EU on 29 March 2019 with no deal;
  2. The UK extends the deadline for leaving the EU, but ultimately still leaves with no deal;
  3. The Withdrawal Agreement is ratified by the UK and it leaves the EU on the basis of an agreed deal on 29 March 2019, or some later date;
  4. Further negotiations lead to the UK leaving the EU with a different deal, either on 29 March 2019 or some later date; or
  5. The UK withdraws its notice under Article 50(2) of the Treaty of the European Union and remains in the EU.

Mr Justice Marcus Smith noted that the first scenario would give the starkest outcome for the purposes of this case and so that was the potential outcome that would be considered first. If that scenario did not frustrate the lease, then it was likely that the other scenarios would not frustrate the lease either. If it did, however, then the other scenarios would need to be considered in turn.

As it happened, it was found that a no-deal Brexit would not frustrate the EMA's lease, and both arguments failed.

This was despite the fact that it was held that when the parties originally entered into an Agreement for Lease in 2011, Brexit was not a foreseeable event. Crucially, the Judge held that EMA had willingly entered into a long term relationship with its landlord on the basis of 25 year lease without a break clause. It had accepted the risk that over that 25 year period, something might happen which would mean it had to leave the premises, notwithstanding the fact that its obligations under the lease would remain in place. The alienation provisions contained within the lease allowed EMA to assign or sublet and indeed, it was established in evidence that the EMA in fact had been seeking a tenant to take an assignment of the lease.

The Judge noted that, ultimately, EMA had agreed to pay too high a price for a lease of a property which now has limited desirability for it, with insufficient flexibility built into the term. The fact that the lease would be less desirable after Brexit did not serve to frustrate the lease and it is well established law that an event will not frustrate a contract simply because it makes a contract more expensive for one party to perform.

Permission has been granted to appeal the result, so the matter is due to be considered by the Court of Appeal. For now at least, what can we take from this case?

  • There is still no reported case in England in which a lease has successfully been held to have been frustrated. This point was not considered in any detail in the judgment, but it is widely considered to be true that it is harder to establish that a lease should be frustrated compared with other commercial contracts. There is still no precedent to rely on for parties who are seeking to argue their lease has been frustrated, for any reason, although the Courts have left it open to be considered in a future case;
  • It was important that the tenant had a right to assign its lease, in determining that it would not be frustrated by Brexit. This should give most landlords confidence, since a typical lease will provide a tenant with some rights to alienation, albeit this is often with conditions attached. However, there may be other commercial contracts which are not assignable. It is still to be seen whether such contracts might successfully be terminated through claiming frustration as a result of Brexit, though in light of the Judge's other comments, it seems that this would be very unlikely; and
  • Brexit issues aside, the case serves as a helpful reminder that it is open to parties who are in dispute to apply to court for an early declaration with regards to an event which has not yet taken place. This can serve to give parties greater certainty in preparing for the future in managing their contracts.

We will be watching the progress in this case and eagerly await the result from the Court of Appeal hearing.

Read the original article on GowlingWLG.com

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