Brexit: "It was not this that I promised to do"

14 August 2018

The relocation plans of two European agencies, the European Medicines Agency (EMA) and the European Banking Authority from London to Amsterdam and Paris respectively, following Brexit, have been widely publicised. Political and economic consequences aside, the move may also have far-reaching legal consequences.

It has transpired that EMA’s lease of its London headquarters, 30 Churchill Place in Canary Wharf, does not expire until 2039 and there is no early break clause. When EMA entered the lease in 2011, neither party expected the UK to withdraw from the EU. The court will now have to decide whether a commercial lease can be frustrated by an event like Brexit, or if the tenant is still liable to comply with its obligations under the lease for the remainder of the term. For EMA this may mean hundreds of millions of pounds in rent payable to Canary Wharf.

Is Brexit a reason to terminate a lease?

If the parties do not settle in the meantime, or if EMA does not assign its lease or does not sublet the premises before it leaves on 30 March 2019, many landlords and tenants will be waiting to hear how the case is decided. If the order is made in EMA’s favour, other tenants may potentially look to use Brexit or another unforeseeable event as the reason to terminate their leases in the absence of an early break clause.

Such termination would be based on the doctrine of frustration.  In the past the courts considered that a lease of land could not be frustrated as it created an estate in land which was indestructible. However, it is now accepted that the doctrine of frustration is capable of applying to a lease of land if a frustrating event occurs during the currency of the term. Such event would mean that no substantial use, permitted by the lease and in the contemplation of the parties, remains possible to the lessee.  

The circumstances in which the doctrine of frustration could apply to a lease of land are exceedingly rare, e.g. the total destruction or serious damage of the premises by fire or earthquake. Historically, such events also included:

  • government expropriation (BP Exploration Co (Libya) Ltd v Hunt (No 2) [1983] 2 AC 352);
  • legislation which permanently prohibited building on the site:  (Cricklewood Property and Investment Trust Ltd v Leighton's Investment Trust Ltd [1945] AC 221); and
  • governmental prohibition or prevention of the use contemplated by the lease (National Carriers Ltd v Panalpina (Northern) Ltd - [1981] 1 All ER 161).;

In Davis Contractors Ltd v Fareham Urban District Council [1956] 2 All ER 145 Lord Radcliffe said:

'… frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.'

Will the court consider Brexit a frustrating event in relation to EMA’s lease? For property practitioners this may be an outcome as important as the result of the referendum that led to it.

Further information

Should you require any further information on this issue please contact our real estate team.

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