Can brexit cause frustration?

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Brexit really does get everywhere. This week – property law.

You may have heard of the ‘doctrine of frustration’ – essentially, where an unforeseen event outside the control of a party that renders a contractual obligation impossible to perform. Some have suggested that this might be used to relieve a party of its obligations where Brexit is the unforeseen event (we remain to be convinced!), but the outcome of Canary Wharf Group (CWG) v European Medicines Agency (EMA), may help clarify the point.

In Canary Wharf, the parties were involved in a dispute involving a tenant (EMA) claiming their lease with their landlord (CWG) will be ‘frustrated’ by Brexit, and therefore their leasehold obligations for the remainder of the lease’s 25 year term (ending 2039) will be discharged when the UK ceases to be an EU Member State. The consequences of the case are substantial for the parties involved, with the rent understood to be approximately £12 million per annum. More broadly, the UK property industry as a whole could be seriously affected by the result, as a finding in favour of the EMA could create an additional route for tenants seeking to discharge their leasehold obligations.

EMA, an EU agency, argue Britain’s exit from the EU is a frustrating event as they claim to be legally obliged to be based in an EU Member State and at the time the agreement was signed in 2011 (5 years prior to the referendum being officially announced), the event of the UK leaving the EU was not discussed between the parties. Further, EMA’s legal representatives have drawn attention to the fact the lease negotiations considered unlikely events such as earthquakes and explosions but not Brexit, which they argue as further evidence that the parties had not contemplated its possibility.

The likelihood of EMA’s argument succeeding appears remote, as while their legal obligation to be based in an EU Member State may result in them renting two offices, inconvenience and/or additional costs caused by an event are not sufficient grounds for frustration. No English case has resulted in a lease being ended due to frustration, as historically the principle has been interpreted narrowly by the courts. However, Brexit is widely viewed as an exceptional event which has inevitably resulted in intense interest around the case, and if the EMA do succeed, their argument is probably unique to their status as an EU agency, meaning most landlords and tenants will probably be unaffected.

The decision is due to be published before 29 March 2019.

For help with preparing your business for Brexit please contact Luke or one of the team.