A frustrating lease - the Brexit effect

Frustration of a contract occurs where an unforeseen event results in the contract (after it has been created) being physically or commercially impossible to fulfil. If a contract is ‘frustrated’, both parties to the contract are released from their contractual obligations under the agreement. 

How does this apply to leases?

The recent case of Canary Wharf (BP4) T1 Ltd and others v European Medicines Agency provided useful guidance.

The facts of the case were that The European Medicines Agency (EMA) had entered into a 25 year lease for its London premises which were partially constructed for their own bespoke requirements. Following the United Kingdom triggering Article 50 to leave the EU, the EU decided to relocate the EMA from London to Amsterdam. The problem for the EMA was that it had 20 years left to run on the lease of its Canary Wharf premises, and no break clause to rely upon.

Rather than paying for leases of premises in both London and Amsterdam, the EMA sought to argue that the lease of the Canary Wharf premises had been frustrated by Brexit. They ran the argument that Brexit was either a “supervening illegality” or a “failure of common purpose”, either or both of which effectively terminated the lease.

The landlord commenced court proceedings seeing a declaration that the lease was not frustrated by Brexit and that the EMA was obliged to continue to pay the rent.

What is “supervening illegality”?

Supervening illegality is when performance of a contractual obligation is made illegal by a change in the law or after the contract has been entered into.

The EMA argued that EU law required the EMA to be based in the EU. Brexit meant that it would be illegal under law for the EMA to remain based in London. This illegality meant that the lease was frustrated.

The Court rejected this argument.  Whatever the position in relation to EU law, it was not illegal under the laws of England and Wales for the EMA to be based in the UK. Supervening illegality must relate to the laws of England and Wales, not to some other jurisdiction.

What is a “failure of common purpose”?

Failure of a common purpose is when the contract has been entered into for a specific purpose, agreed between the parties, and where a change in circumstances means that the purpose can no longer be achieved.

EMA argued that it had been agreed with the landlord that the purpose of the lease was to provide a permanent headquarters for the EMA for 25 years. They argued that Brexit meant that this purpose could no longer be achieved and that the common purpose of the lease would therefore fail.

The Court rejected this argument and held that there was no common purpose. The landlord and the tenant had had divergent purposes at the time of entering into the lease. The judge also found that although Brexit was foreseeable only as a “theoretical possibility” at the time that the parties entered into the lease, it was nevertheless perfectly foreseeable that, over the term of the 25 year lease, EMA might have to abandon the premises. Indeed, the assignment and subletting provisions in the lease expressly contemplated this possibility.

What examples have there been of events that justify ‘frustration’?

The Court has upheld frustration, and therefore termination of the lease, in the following situations:-

• The lease provided for the use by the tenant of the property for a single purpose which subsequently became illegal;
• There was a short term lease of a building or structure which was destroyed;
• The purpose of the lease was to enable the tenant to view some particular event which was subsequently cancelled;
• Wartime restrictions made it impossible for the parties to carry out a contract for the supply of timber in a timber yard which was the matter of an agreement for lease between them;
• A salmon fishery became unusable due to the construction of a nearby bombing range.

What about examples of events that have not been sufficient to justify ‘frustration’?

The Court has held that the following situations do not justify frustration:-

• A ten-year lease of a warehouse had three and a half years to run and the tenant’s only access to it was closed for a year;
• The tenant was ousted from premises by government requisition;
• Building restrictions suspended the tenant’s ability to build in accordance with his obligations under a long lease;
• The tenant was prevented from occupying the premises because of his status as an enemy alien;
• Although the primary use contemplated by the lease became illegal, there were other uses of the premises available to the tenant;
• There was a long term lease of a building and the building was destroyed (contrast this with the destruction of a building on a short term lease).

The conclusion to be drawn from the case law is that satisfying the Court that a lease has been frustrated is a major challenge. As can be seen recently from the EMA case, frustration for a tenant may not be the same as frustration for a landlord. The two need to be aligned, and/or there will need to be illegality under English law, before the Court will accept that a contract has been frustrated.

For any queries in relation to this blog, please contact the Litigation Team at aet@hughes-paddison.co.uk or on 01242 586 841.