Can Brexit Frustrate a Lease

An important question which has arisen in the commercial property industry in recent years is whether Brexit operates to frustrate a lease.   What exactly does that mean?

The doctrine of frustration in English law provides that after a contract is entered into, where something occurs that makes it physically or commercially impossible for that contract to be fulfilled or which alters the obligations under the contract so radically from that which the parties agreed, the contract will come to an end and the parties will be released from their obligations. As an example, after World War II broke out, a contract to deliver goods manufactured in Leeds to Poland became frustrated because after the contract had been formed, it became illegal to sell goods into Poland. Likewise when the coronation of King Edward VII was delayed because he was ill, the purchase of tickets to watch the coronation on that day was frustrated because there was no coronation. Frustration immediately brings the contract to an end without liability on either party.

In July 2019, the European Medicines Agency (EMA) sought to challenge the ruling of the High Court that Brexit does not operate to frustrate the terms of its lease.

The background to the case was that in 2014 the EMA entered into a 25 year lease of premises in Canary Wharf, with a total rent payable of £500 million.   Following Brexit, the EMA will need to relocate its headquarters to a new location in the European Union as a result of a change in regulations governing its status. It intends to relocate to Amsterdam. The problem is that it still has 20 years remaining on its lease at Canary Wharf.   The EMA had argued that after Brexit it would not be able to operate within the UK as it would not have legal power to comply with the terms of the lease. In particular, it contended that the understanding of the parties when the lease was agreed was that it would need a permanent headquarters for the next 25 years and if that could not be achieved, the common purpose of the lease failed. As a result, it said, Brexit was an unforeseen event that fundamentally altered the contract.   The landlord challenged this position, pointing out that the EMA had the ability to assign or sub-let the lease.

Unsurprisingly and to the relief of commercial landlords, the High Court agreed with the landlord. It recognised that the EMA had the power to assign or sub-let the lease but also considered that the EMA was still in a position to comply with the terms of lease after Brexit, even if it could not operate from the premises.   In addition, given the EMA’s status as a body of the European Union, any lack of ability in compliance with the terms of the lease would essentially have been self-inflicted by the terms applied by the European Union on the powers of the EMA following Brexit.

The ruling will be a welcome one for landlords, particularly those with tenants who have strong European connections. It is generally difficult to argue that a lease has been frustrated.   The decision is hardly surprising, given the uncertainty and profound implications for the UK property market had the judge decided in the EMA’s favour.

It is pertinent to note however in this case that the EMA appealed the High Court’s ruling but that the case was settled before the appeal had been decided. The appeal no doubt gave the EMA a bargaining chip, however in the writer’s view, it is highly unlikely the decision of the High Court would have been overturned.

For tenants who no longer have need of premises, they will usually be able to assign or sub-let them, depending on the alienation provisions in their lease.   If neither of those options is available, it may be possible to negotiate a surrender of the lease, but almost always on the basis of some payment to the landlord.  These will be important considerations to businesses with European connections or which are considering relocation to the European Union following Brexit and we could see companies under financial pressure because of Brexit seeking to find ways to escape their lease obligations.

This article is not intended and should not be relied upon as legal advice, Should you wish to discuss your matter, please contact Joe Reeves of our Litigation Department on 0207 481 6383 or joe.reeves@wellerslawgroup.com.