Frustration by reason of Brexit? – A challenge to the doctrine of frustration in commercial leases

Frustration by reason of Brexit? – A challenge to the doctrine of frustration in commercial leases

Unless an extension between the UK and the EU is agreed (or there is a reversal of the referendum vote), the United Kingdom will leave the European Union at 11pm on Friday 29 March 2019.

In mid-January, the High Court will determine a case between a UK company (Canary Wharf (BP4) T1 Limited) and an EU institution (European Medicines Agency). The outcome of this case has potential to re-shape domestic law, lead to adverse repercussions for institutional commercial landlords and impact the political dealings between the UK and the EU.

Historical Backdrop

The European Medicines Agency (“EMA”) entered into a 25-year lease in 2011 of 30 Churchill Place in Canary Wharf, which was to become its flagship headquarters. No break clause was included within the lease, had there been, EMA would have had the ability to end the lease earlier.

With the UK government triggering Article 50 and thus commencing the steps to leave the EU, the EMA announced its intention to relocate its headquarters to Amsterdam. The dilemma for EMA was what to do with their expensive site in Canary Wharf, given that their rent and related charges under their tenancy comes to approximately 16 million euros per year.

Whilst there are other potential avenues for EMA under the lease, such as assignment or underletting, or alternatively negotiating a surrender of the lease; EMA has instead indicated that it will rely upon the doctrine of frustration to release them from their liabilities and terminate the lease.

The Doctrine of “Frustration” in Commercial Leases

Frustration is a contract law principle and occurs when an unforeseen event results in the termination of a contract. The contract terminates due to the fact that the performance of its obligations becomes impossible, illegal or prevents its main purpose from being achieved [1].

The doctrine is difficult to prove in normal circumstances, but even more so when it concerns agreements relating to land (i.e. licences and leases). In Krell v Henry [2]Mr Krell let a room in his property on Pall Mall, to Mr Henry so that he could watch the coronation of King Edward VII. The coronation was postponed due to the ill-health of the King. The court ruled that the licence to occupy the room had been frustrated as the illness of the King led to the non-occurrence of the event (which was fundamental to Mr Henry’s decision to enter into the contract in the first place) – meaning that the contract was impossible to perform.

Following  Krell v Henry, doubt has been cast on whether frustration could apply to leases, until the House of Lords decision in the 1981 case of National Carriers v Panalpina[3] where it was found that it could – albeit in limited circumstances. Lord Wilberforce opined the potential circumstances whereby frustration might be demonstrated , namely where a proposed tenant desired possession of a building for a specific purpose, but the purpose became impossible to perform due to an unforeseen event.

To the present day, the courts have not determined a single case whereby a lease has been frustrated.

The Arguments

Canary Wharf Ltd is seeking a declaration from the court that Brexit was a foreseeable event and therefore EMA must adhere to its obligations under the lease. Canary Wharf Ltd will argue that Article 50 of the Lisbon Treaty had always been in existence and there was political debate surrounding the UK’s membership of the EU in 2011. Canary Wharf Ltd will also point to the financial loss it is likely to suffer if the lease is frustrated, as they are reliant upon the rental income from EMA to repay lenders that subsidised the construction of the building.

The EMA will seek to convince the court that the triggering of Article 50 was an unforeseen event in 2011 (i.e. when they originally took on the lease) and thus frustrates the lease between the parties. The EMA, as an EU agency, will also rely on the fact that they have a policy of ensuring their premises are located in EU member states and cannot occupy the premises post-Brexit.  

(Potential) Legal Ramifications

Whatever the decision, there are likely to be definite consequences for commercial landlords and tenants.

On the one hand, if the court finds in favour of Canary Wharf, it will confirm the established principle that frustration only applies to commercial leases in the rarest of scenarios. It will also confirm that courts do not consider political changes (whatever the magnitude) as being capable of frustrating a commercial lease. It will demonstrate that longer leases are a risky gamble for commercial tenants in an uncertain political climate. It could result in commercial tenants demanding politically-geared or event-geared exit clauses – how this would work in practice remains to be seen.

On the other hand, if the court finds in favour of EMA, it would confirm that Brexit can frustrate leases. EMA’s lease would come to an end, without them having to fulfil their obligations or pay the whopping £400 million financial liability under the lease. This could bring a surge in litigation – due to the tempting lure for commercial tenants to get out of leases, especially if they have links to EU business or trade. Furthermore, if Brexit can be classed as an ‘unforeseeable event’, what about general elections or other political/economic/societal decisions?

Beyond the realm of commercial property, the case may also set a risky precedent for businesses to use Brexit to escape onerous or unfavourable commercial contracts. As frustration is more prevalent in commercial contracts (as opposed to property based contracts), it may be simpler for parties to argue Brexit in this context.

Whilst the story dominating headlines at the time of writing concerns the negotiations between Westminster and Brussels on the withdrawal arrangements, the outcome of the Canary Wharf v EMA case may have greater legal and economic ramifications than the relatively discreet coverage it has received so far.

How Blaser Mills Law can help:

Our highly-experienced Real Estate lawyers act on behalf of landlords and occupiers, individuals and companies, as well as advising on commercial property portfolios. Complemented by our Property Litigation team, we can provide a seamless crossover between contentious disputes and transactional property matters.

If you would like any further information on this topic or would like advice on an existing/proposed commercial lease, please do not hesitate to contact our Real Estate and Development team on 020 3814 2020

[1] Oxford Dictionary of Law, 7th Edition, p242 ‘Frustration of Contract’

[2] Krell v Henry [1903] 2 KB 749

[3] National Carriers Ltd v Panalpina (Northern) Ltd [1981] 1 All ER 161