Brexit not enough to frustrate a lease – High Court ruling

‘Frustration’ does not only mean feeling annoyed as a result of not being able to change something. It is also an English legal doctrine, which provides that a contract may be discharged in certain circumstances.

The contract may be said to be ‘frustrated’ when:

• something occurs to make it physically or commercially impossible to fulfill the contract; or
• an obligation is transformed into something significantly different from what was originally agreed.

While there are frustrations around Brexit for most of us, a recent High Court decision considered whether the UK’s departure from the EU could amount to an event which would frustrate a lease.

The High Court decided that Brexit would not constitute an event capable of frustrating a lease. While it is important to note that the decision in this case rests on its specific facts, it does provide an indication of the kind of test the court would likely apply in similar cases when (or if) Brexit finally takes place.

Facts of the case

The European Medicines Agency (EMA) entered into a 25 year lease of premises to be used as its London HQ starting in 2014 and ending in 2039. The lease contained no break clause. Following the 2016 referendum, the EU decided to relocate the EMA to Amsterdam, in order to ensure that its offices are within an EU Member State after Brexit. The EMA was facing the obligation of having to pay a multi-million pound rent for the full term of the lease, for premises which it was forced to vacate by the EU.

In August 2017, the EMA informed the landlord that it regarded Brexit to be an event frustrating the lease. The landlord rejected the EMA’s assertion and sought a declaration to confirm that “the withdrawal of the UK from the EU and/or the relocation of the EMA will not cause the lease to be frustrated”.

The Argument

The EMA argued that there were two forms of frustration on which it could rely:

1. Frustration of Common Purpose: the EMA argued that the intended common purpose was that the premises would be used by the EMA as its HQ for the duration of the term of the lease and that Brexit would frustrate this common purpose.
2. Frustration by Supervening Illegality: the EMA also argued that, after Brexit, it would no longer be lawful for the EMA to occupy or otherwise make use of the property, and therefore to pay rent, as it would lack capacity to act to fulfill its obligations under the lease.

The Judgment

The High Court rejected both lines of argument. Mr Justice Marcus Smith was clear that the lease would not be frustrated by Brexit, either through frustration of common purpose or frustration by supervening illegality.

The issue of Brexit was not of common purpose at the time of the lease being agreed to and the EMA clearly had the legal capacity to maintain and/or wind down its premises in London, notwithstanding the UK ceasing to be a Member State of the EU.

This might though not be the end of the matter as the decision is to be appealed.  When the verdict is known (likely to be in 2020), we will provide a further update.

If you would like to find out more about commercial leases and the doctrine of frustration please do not hesitate to contact the head of our commercial property team, Artan Llabjani.

Alternatively, you can also contact one of our other solicitors in the Commercial Real Estate team here.