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Frustration not the answer to terminating a lease

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Posted on 02 April 2019

With no clear path yet determined for our exit from the European Union, many commercial tenants could have been forgiven for watching the dispute between the European Medicines Agency (EMA) and its landlord, Canary Wharf, with their fingers crossed.

The point at issue was the EMA’s attempt to prove that its lease was frustrated by Brexit and should therefore be terminated. Had the judge agreed with the EMA, there would have been a danger that tenants, looking for a reason to exit a lease arrangement, could argue that Brexit constituted a frustrating event.

EMA must relocate to EU country

The EMA had agreed to enter into a 25-year lease with Canary Wharf in 2011, two years before David Cameron announced his intention to hold a referendum.  The lease was granted in 2014, after the referendum was formally announced. Although the lease did not contain a break clause, it did contain the standard alienation clauses including the right to assign or sub-let. Following the referendum result, the EMA told the landlord that it would be seeking to terminate the lease on the basis of frustration of the contract because, as an EU agency, it would be illegal to be based in a non-EU country following the UK’s exit. This argument was reinforced by the EU announcement in 2018 that the EMA was legally required to relocate to an EU country (their HQ moved to Amsterdam in March 2019). In addition to the purported illegality of the EMA remaining in London, the EMA’s desire to divest itself of its lessee obligations was also shaped by the fact that continuing the lease would reportedly cost the EMA around £500m.

Proving frustration is difficult

In court, frustration of a contract was considered at length. To frustrate a contract, an event has to occur that fundamentally changes the performance of a contract so that it would be unjust for both parties to continue to abide by it. Proving frustration is very difficult – and unusual, particularly in the case of leases. Just because a contract becomes more expensive or more onerous to perform does not amount to frustration. The judge considered five commonly held scenarios in which the UK might leave the EU against which to test the principle of frustration, with ‘no-deal’ being treated as the most onerous. In the event, the judge ruled that a no-deal would not frustrate the lease so, on that basis, he considered that the other scenarios would also fail. The EMA’s claim that Brexit was a frustrating event because it meant the EMA was no longer able to stay in the UK, and because it made the cost of honouring their lease prohibitively expensive, was incorrect. Although the EMA had willingly entered into a 25 year lease without a break clause, it had included alienation clauses which indicated it had accepted the risk that changing circumstances over that period might well alter their ability to stay.

Brexit not a frustrating event

This ruling has implications for any business entering into a commercial contract and hoping to rely on the law of frustration if Brexit proves to be the disruptive influence predicted. Applying the principle of frustration to a lease has rarely succeeded and would be difficult to do so, given the variations and flexibility that can be negotiated, unless an event occurred that affected the entire  agreement and made it unjust for both parties to be held to it. Although Brexit has provided the first opportunity for many to consider challenging their contracts on the basis of frustration (and much will depend on the original drafting) in the overwhelming majority of cases, such a challenge is unlikely to succeed. The EMA has been granted leave to appeal the decision but since then, it has agreed to sublet the property to WeWork and has settled the case with Canary Wharf. On the evidence to date, it is unlikely that landlords have much to fear from tenants using Brexit to exit property contracts or leases. Likewise, tenants should take the view that Brexit is unlikely to provide the key to exit an unsatisfactory lease without obligations.

Tags: Real estate

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