How frustrating is Brexit (where leases of commercial property are concerned)?

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For those readers who just cannot get enough Brexit-related news and analysis, the High Court in Canary Wharf (BP4) T1 Limited v European Medicines Agency recently provided an interesting, if perhaps unsurprising, take on the doctrine of frustration as it applies to leases. In this case a lease of expensive office accommodation with a potential future rent liability of around £500 million.

In 2011 the parties entered into an agreement for an under-lease of 30 Churchill Place, Canary Wharf. The under-lease itself was completed in 2014 for a term of 25 years with no break rights. The current rent is about £13 million per annum. The claimants were the landlords of the under-lease and the management company of the Canary Wharf estate. The tenant is a European Union agency whose role is the evaluation of medicinal products. The EMA employed about 900 people in the property in Canary Wharf.

Although a good deal of time was spent considering the EMA’s position under EU law, for our purposes the argument hinged on whether Brexit, were it to happen, could be said to frustrate the lease. The EMA’s case was that it did. Because of EU Regulations made in 2018 they were obliged to relocate to Amsterdam. They set out their view on the lease in a letter to the claimants in August 2017: “Having considered the position under English law, we have decided to inform you that if and when Brexit occurs, we will be treating that event as a frustration of the Lease.” Canary Wharf took the opposite view and issued proceedings for appropriate declarations (this in itself is notable, because courts do not like making judgments in the abstract, much less “answering exam questions”).

Frustration and force majeure

The EMA was not able to rely on force majeure as part of its argument. That was for the simple reason that the concept of force majeure developed as a response to the very limited circumstances in which frustration of a contract can occur. The parties to a contract are free to agree between themselves those events which will be treated as bringing the contract to an end or, often, suspending its operation; but there must be a force majeure provision in the contract itself before this can operate. Institutional leases rarely include force majeure clauses, and this lease was no exception.

In the judgment the court went to great lengths to set out the basis of the law of frustration. Frustration is one way in which a contract may be brought to an end. Where it operates, the parties’ obligations to each other cease and any existing losses lie where they fall.

Can frustration apply to leases? Historically it was thought not, mainly because of the peculiar feature of leases being that they create not just bundles of rights and responsibilities but also legal interests in land; English law has always tended to regard such property rights as somewhat sacrosanct. That “specialness” of property rights is illustrated by the problems that face anyone trying to argue that a right of way over their land has been abandoned, for example.

By 1981 and the decision of the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd the position had changed; in that case it was held that, as a matter of principle, a lease could be frustrated, but on the facts the lease in question then was not frustrated. Since Panalpina there has never been a reported decision in which frustration has been held to apply to a lease on the facts of the case.

Impossibility

In principle, for a contract to be frustrated something must occur after its formation which renders it physically or commercially impossible to fulfil the contract, or transforms the obligation to perform into a radically different obligation from that assumed when the contract was entered into. So, in the first case of its kind, Taylor v Caldwell (1863), the defendants had agreed to permit the plaintiffs to use a music hall to hold concerts on four specific nights. After the contract was made but before the first performance night, the hall was destroyed by fire.

The court held that the defendants were not liable in damages, since the existing doctrine of “sanctity of contracts” applied only to a promise which was positive and absolute, and not subject to any condition express or implied. So the destruction of the subject matter of the contract might be enough to amount to frustration. Events that merely make performance much more difficult, more costly or less profitable, will not. So the closure of the Suez Canal in 1956 was not enough to enable shipping contractors to be discharged from their charterparty obligations to deliver goods, even though they had to go the long way round the Cape of Good Hope to comply with their duties.

Common purpose and illegality

Frustration may also apply where the commercial adventure anticipated by the parties has been made impossible by events outside their control or where that performance has been made illegal. The EMA argued that Brexit would change the legal landscape to such an extent that its activities in England, which had previously been lawful would no longer be so (because of complex issues relating to its constitution and its powers). Finally, the EMA relied on the inability to fulfil the “common purpose” of the lease in the post Brexit landscape.

The decision

The EMA lost on all grounds. The court held that on a proper interpretation of its constitution the EMA did not lack the vires (power) to continue to operate so as to discharge its liabilities under the lease; there was no “common purpose” because the landlord’s interest was in securing a rental income, the EMA’s purpose was in having premises to occupy, and while the two went hand in hand the letting was not a common purpose in the sense required for frustration to operate.

The fact that the EMA would be obliged to carry on paying rent for the Canary Wharf properties as well as rent for its new premises in Amsterdam was not enough – largely because the lease allowed the EMA to find an assignee or sub-tenant subject to the appropriate consents.

Comment

The decision will not come as a surprise to many. It was, and apparently still is, notoriously difficult to establish that a lease has been frustrated. Here though the court’s reasons did not depend on any peculiar properties of leases over and above other contracts. If parties to contracts that are “Brexit sensitive” need a potential exit route in the event of Brexit happening, then specific drafting is likely to be required, whether that is in the force majeure section or otherwise.

Time may well be running out for drafting such clauses and for varying existing contracts, though in the world of Brexit the only certainty seems to be that nothing is, in reality, certain.

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