Frustration and Brexit

Brexit- a preliminary deal done but what does it mean for EU citizens in the UK?

Canary Wharf T1 Limited and the European Medicines Agency (EMA) are currently involved in litigation surrounding the EMA’s lease of office premises and the impending relocation by the EMA to Amsterdam.  The EMA case highlights the issues arising from Brexit and considers the legal principles of frustration in relation to a lease.

Overview

In 2011, the EMA and Canary Wharf T1 Limited entered into an agreement to lease 10 floors of an office building located in Canary Wharf. The parties subsequently entered into a lease for a term of 25 years, to expire in 2039 with no early break clause.

As an agency of the EU, the EMA has claimed that its headquarters must be located within an EU Member State. Following the Brexit vote, the EMA made a decision to move its headquarters and some 900 jobs to Amsterdam. The EMA has contested that Brexit amounts to an unforeseen event of “frustration” and that the agreement for lease and lease were “expressly entered into on the ground that the UK would remain within the EU”.

In response to the actions of the EMA, Canary Wharf T1 Limited has sought a ruling from the courts confirming payment of the rent, rates and service charges for the remainder of the lease by the EMA as tenant under the lease.

What is frustration and how is it achieved?

Frustration occurs where an unforeseen event results in a contract (post-formation) being physically or commercially impossible to fulfil. A contract could therefore be ‘frustrated’ by such an event and as a result, both parties would be released from their contractual obligations under the agreement. 

To satisfy a claim of frustration, generally speaking, the event must be:

  • “entirely beyond what was contemplated by the parties when they entered the contract”;
  • should not be an event which could have been foreseen by the parties”; and
  • “must render further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.”

The courts will therefore not only consider the event in question, but also consider the wider circumstances and what was contemplated by the parties when entering into the agreement in the first place. 

Historically, there has been little consideration by the courts of a lease of land or property having been ‘frustrated’. Previous circumstances where the court has found grounds of frustration to terminate leases have occurred in rare cases such as earthquake, fire or legislation which permanently affects building on and/or use of a site.

The court’s decision on whether or not Brexit amounts to frustration of this lease will therefore be of great interest from a commercial property perspective but also for those with a greater interest in the potential wider commercial consequences of Brexit. The court hearing is scheduled to take place in March 2019.

What should businesses be aware of?

As the Brexit deadline approaches, it is important for businesses to be aware of the commercial implications relating to contractual obligations and how the performance of these obligations might be affected.

Businesses should review their existing contracts and assess whether any further advice might be required in order to take account of any changed commercial landscape that may be in place after 29 March 2019.

Contact our experts for further advice

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