Frustrated by Brexit?

19 March 2019

Whatever your views on Brexit and whether the UK should leave or remain and on what terms, Brexit seems a source of frustration for many people.  The question that the court had to decide was: can a contract be frustrated because of Brexit?

Case

In 2011, the European Medicines Agency (EMA) agreed to take a lease of 10 floors of a newly constructed building in Canary Wharf.  The EMA is an EU body that regulates the distribution of medicines within the EU.  This was not a short-term commitment.  The lease was for a 25 year term (from 2014) at a rent of £13 million pa with no tenant’s break right.  The EMA carried out a bespoke fit-out (costing ca. £40m).  After the Brexit referendum, everything changed.  London was no longer suitable as the headquarters of an EU agency, so the EU decided to relocate the EMA to Amsterdam.  When the UK government triggered Article 50 and put in train the process for the UK to leave the EU, the EMA wrote to the landlord, the Canary Wharf Group, saying that, when the UK leaves, the EMA would treat the lease as at an end.  How could they do this if the lease didn’t contain a tenant’s break?

Frustration

English law recognises that, in limited circumstances, a contract can become “frustrated”.  If, through no fault of either party, something unexpected happens so that the contract becomes radically different from what the parties had bargained for, the contract will be treated as frustrated and either party can seek to bring it to an end.  This is not easy to prove, however, and there have been very few scenarios down the years in which a claim has succeeded.  The most famous case dates back to the coronation of King Edward VII in 1902.  An enterprising person rented out his flat in Pall Mall for the afternoon of the coronation, as it would give a bird’s eye view of the coronation procession.  Unfortunately, the King fell ill and the coronation was postponed.  The paying party was entitled to his money back.  The only reason for hiring the flat was to see the procession and, without it, the contract was frustrated.

Outcome

As noted in our earlier article addressing the possible implications of a ‘No Deal’ Brexit for commercial contracts (see here), the ability of a party to assert a contractual agreement is frustrated largely depends on the context of the contract itself. Moreover, for an event to be deemed to be frustrating it must have been entirely beyond what was contemplated by the parties when they entered into the contract.

Here the court was not persuaded that the EMA should be allowed to terminate the lease agreement on the basis of frustration caused by Brexit.  However unwilling it might be to do so, EU law did not prevent the EMA from keeping its HQ in London.  It had the legal power to continue to let the property and to pay rent. The decision to relocate to Amsterdam, while understandable, was essentially a political one and the EMA must have realised that it ran the risk of being left with a building in London that, because of the bespoke fit-out and high rent, it could not easily assign or sublet.  To that extent, the EMA’s predicament was self-induced.  The judge accepted that, when it negotiated the lease, the prospect of the UK leaving the UK was remote.  Nevertheless, the lease allowed for assignment and subletting, so the possibility of the lease becoming surplus to the EMA’s requirements had been considered at the outset.  The truth was that the EMA had struck a poor bargain.  It is likely that the landlord would have strongly resisted a tenant’s break right in view of the substantial capital contribution that it had made but that is a long way from saying that the lease had now become impossible to honour.

Conclusion

This decision was watched with interest by parties engaging in cross-border transactions, and will certainly be a relief to those looking to ensure such agreements remain in place and cannot be arbitrarily terminated. This case is a stark reminder of the need for all parties to “future proof” their commitments and to allow themselves flexibility should their circumstances change.

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