Following an
expedited hearing in the first major property case with Brexit at its heart,
the High
Court has ruled* that Brexit does not frustrate a lease.
In this
case, the landlord, Canary Wharf Group (CWG), was seeking a declaration that
Brexit did not frustrate the European Medical Agency’s £13 million a year lease
of a 10-floor property at Churchill Place in Canary Wharf.
On 5 August
2011 the EMA signed an agreement for lease, obliging it to take a lease of
Churchill Place following completion of the development of the property for a
term of 25 years.
The lease
was eventually completed on 21 October 2014 for a term commencing on 1 July
2014 and expiring on 30 June 2039.
Crucially,
the lease does not contain a break clause.
There subsequently
of course followed the EU referendum on 23 June 2016, followed by the
triggering of Article 50 on 29 March 2017.
The EU
determined that a non-member state could not host EU agencies, which led to the
EMA later in 2017 announcing it would relocate to Amsterdam, which it has now largely
done.
That still
leaves the EMA on the hook at Canary Wharf for rent of £13 million a year plus
outgoings until 2039.
The lease permits
assignment (of whole) and subletting (in whole or in parts), subject to the
sort of conditions you would expect to find in leases such as this. Those are
conditions concerning landlord’s consent, the need for guarantees, and the
financial standing of an assignee etc, including an obligation for the EMA to
enter into an authorised guarantee agreement in relation to an assignee. The
lease also permits group company sharing or sharing with another EU entity
whilst the EMA is the tenant.
The judgment
refers to attempts the EMA has made, unsuccessfully to date, to dispose of the
premises.
By a letter
dated 2 August 2017, the EMA wrote to CWG stating that:
“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.”
CWG
commenced proceedings because it took the view that the commercial uncertainty
created for CWG and its lenders by EMA’s contention required early resolution.
Frustration,
based as it is on largely ancient law, is rarely used as a way of getting out
of contracts.
The doctrine
of frustration operates to bring a contract prospectively to an end because of
the effect of a supervening event.
To succeed
you must be able to demonstrate that something has happened after completion
that makes it impossible to fulfil the contract and unjust to hold a party to
its obligations.
It’s not a
doctrine that can be demonstrated easily.
The courts
have also shown recently that they are generally unwilling to enable parties simply to escape
bad bargains (for example in Arnold v Britton).
The EMA
argued that when they negotiated the agreement for lease back in 2011, they
could not have expected the UK to withdraw from the EU.
CWG, in
contrast, argued that the existence of Article 50 in the Treaty of the European
Union meant that Brexit was not unforeseeable, and that in any event the EMA
could have requested a break clause (in fact they did originally, but it was conceded during the lease negotiations).
The High
Court, on 20 February 2019, ruled in CWG’s favour, in a judgment that will
bring great relief to the property industry, and in a wider context too.
It’s a very
complex judgment running to some 95 pages. The issues discussed by Justice
Marcus Smith include the constitutional aspects of the EU as well as the law of
frustration in England and the interpretation of leases.
There was
even expert evidence given by two experts in the field of Modern British
Political History and Political Science – not an everyday occurrence in
property disputes – directed to the question of the foreseeability of the
withdrawal of the UK from the EU as that issue was viewed prior to 5 August
2011, when the agreement for lease was signed.
The Court found that the withdrawal of the UK from the EU was not “relevantly
foreseeable” at a time a few years before the result of the 2016 referendum.
So, although
the possibility of Brexit might have been in some way foreseeable in 2011, it
wasn’t sufficiently foreseeable that it could have been reasonably expected to
impact on the parties’ decision-making at the time.
Nevertheless, even if the lease were frustrated, the frustration was self-induced on
the part of the EMA, considering the EMA in its constitutional context within
the European Union.
The Court also found that it was foreseeable that for some reason over
the term of the lease EMA might want to relocate and that was dealt with
by the detailed alienation provisions.
Furthermore, it would not
be impossible as a matter of European or English law for the EMA to continue to
hold the lease post-Brexit and there was no legal requirement for it to leave
the UK as an automatic consequence of Brexit.
The court therefore concluded that there was (a) no frustration of common purpose; and (b) no supervening illegality, and so the lease was not frustrated.
The case
demonstrates how difficult it is to succeed in arguing that a lease has been frustrated
in English law, and specifically now how difficult it is to make that argument regarding
Brexit.
This
decision could have far-reaching implications beyond the property world for
commercial contracts potentially frustrated by Brexit.
It is
unlikely however to be the last word on the effects of Brexit on existing
contracts.
Luke
Harrison, of Debenhams Ottaway, has told CDR:
“While Smith J has found that in the
case of the EMA the lease was not frustrated, he does not find that Brexit (in
whatever form it takes) cannot result in frustration. Each case will ultimately
turn on its own facts and I expect to see many more such cases before the
courts particularly if there is a hard Brexit.”
The EMA, for
its part, is carefully studying the judgment and its implications, and has said it considers
CJEU clarification of EU law to be the most appropriate way forward.
