Frustration Claims: Don’t Blame It On Brexit!
There isn’t a day that goes by where Brexit isn’t in the news, so it’s unsurprising that a tenant has attempted to use Brexit as a reason for terminating a Lease early by claiming that it has been frustrated by Brexit.
The legal doctrine of frustration enables a contract to be brought to an end when something unforeseen happens after it was entered into, which makes the it either impossible to fulfill, or transforms the obligations into something completely different from when it was entered into.
In the Case of Canary Wharf (BP4) T1 Limited v European Medicines Agency (heard earlier this year) the High Court had to decide whether a Lease was frustrated by Brexit. In the Case the European Medicines Agency (EMA), an agency of the European Union, was a tenant of premises at Canary Wharf under a Lease granted in 2014 for a term of 25 years with no Break Clause.
After the UK voted to leave the EU, an EU Regulation was passed requiring the EMA to relocate to Amsterdam.
The EMA claimed that once Brexit occurred it would treat that event as a frustration of the Lease. It argued that once the UK withdrew from the EU it would no longer be lawful for it to pay rent under the Lease because as an EU entity it couldn’t lawfully be located in the UK.
It also argued that if it were obliged to pay rent at alternative premises in Europe, whilst remaining bound by the terms of the Canary Wharf Lease, it would effectively be required to pay “double rent” which would seriously impair its capacity, effectiveness and independence.
The Landlord sought a declaration from the Court that the UK’s withdrawal from the EU wouldn’t amount to frustration of the Lease and that the EMA would remain bound by its obligations for the remaining term of the Lease.
The High Court found that the Lease wouldn’t be frustrated as a result of the UK’s withdrawal from the EU. Although the Judge accepted that the EMA would be paying for premises which it no longer required as a consequence of events beyond its control, the EMA had nevertheless chosen to enter into a long term Lease with long term obligations which it had negotiated.
The EMA could have opted for different premises with a shorter Lease, or it could have negotiated a Break Clause and paid a higher rent and foregone the inducements which it had received to enter into the current Lease.
The EMA would therefore have to observe and perform the covenants under the Lease for its remaining term unless it was able to assign or let the premises, or negotiate a surrender of the Lease.
So, what does this mean for landlords?
This decision will be welcomed by landlords who feared that the floodgates for frustration claims from struggling tenants would be opened if the Case had been decided in favour of the Tenant.
However, landlords shouldn’t breathe a sigh of relief just yet as the EMA has now been granted permission to appeal, so this may not be the end of the matter.
As is the case with Brexit… watch this space!