Out-Law News | 20 Feb 2019 | 4:56 pm | 4 min. read
The court's finding in favour of the landlord in the case will be met with a "sigh of relief" by others, according to property disputes expert Matthew Baker of Pinsent Masons, the law firm behind Out-Law.com. The High Court ruled that the EMA was not able to treat the lease as 'frustrated', and therefore remains bound by the full 25-year term.
"If the EMA had been successful, hundreds of lucrative contracts would have been called into question and the outcome could have sent shockwaves across the property community," said Baker.
"As 29 March fast approaches, we're likely to see more businesses attempt to minimise exposure to risks posed by Brexit. Expensive property leases will be hitting many businesses hard at a time when workforce reduction and relocation is top of the agenda. But the reality is that the argument of frustration has been talked about for years but rarely applied because the threshold is very high. The bottom line is a contract is a legally binding agreement and Brexit cannot override that," he said.
In this case the EMA, as the tenant, sought to argue that the legal doctrine of frustration applied to bring a contract – in this case a lease - to an end in circumstances where the central obligation can no longer be performed; or where a supervening event so significantly changes the nature of the contract that it would be unjust to hold the parties to what they agreed. The legal test is quite rightly a strict one, which requires the supervening event to render the performance of the contract "radically different" when compared to the considerations in play when the contract was agreed.
The EMA is an agency of the EU. In 2014, it signed a 25 year lease on its current premises at Canary Wharf in London. It claimed that the UK's withdrawal from the EU would cause the lease to be frustrated, as it will trigger a number of legal changes relating to its legal capacity to continue with the lease. Its case was based either on frustration of 'common purpose' – that is, its ability to provide EMA services within the EU - or on subsequent legal changes and supervening illegality.
The judge, Mr Justice Smith, said that it was not yet clear what form the UK's departure from the EU would take. However, noting that he could not 'wait and see' given the circumstances in the case, he decided that he would determine whether a frustrating event occurred on the basis of a 'no deal' scenario, which he said was "most likely to produce an answer that will be helpful to the parties on the question of frustration generally".
On this basis, the EMA's privileges and immunities granted by virtue of EU law would be "materially and adversely affected". However, the EMA would not be prevented from paying rent to a landlord in a non-EU country; and there was nothing in EU law which prevented the EU from maintaining the headquarters of one, or more, of its agencies in what would be a 'third country' after Brexit.
"I entirely accept that there are many and good reasons why the [EU] would choose not to do so, but these reasons have nothing to do with the capacity of either the EMA or the [EU]," the judge said. "It follows that I reject the contention ... with complete confidence, that the capacity of the EMA to continue performing its obligations under the lease post the [UK's] withdrawal from the [EU] does not continue."
"[T]he EMA's case on supervening illegality must fail ... [T]he EMA has the capacity, post the withdrawal of the [UK] from the [EU], to continue to use and/or dispose of the premises and ... it continues to have the capacity to pay rent (and perform its other continuing obligations) under the lease … Even if the EMA did lack the capacity to continue performance by reason of supervening illegality under [EU] law, this is not a matter that the English law of frustration will have regard to," he said.
The judge went on to consider whether the UK's departure from the EU rendered the performance of the contract 'radically different': the so-called 'common purpose' test. He found that, although the landlord had made some alterations to its original plans for the building to accommodate the EMA, it could not be said that the lease was designed to "provide a permanent headquarters for the EMA for the next 25 years and that if that could not be achieved, the common purpose of the lease had failed".
In addition, and despite concluding that the UK's departure from the EU was not something that was "relevantly foreseeable" when the parties agreed the lease in 2011, the judge found that the EMA had "assumed the risk of change" over the 25-year term of the lease. The EMA had "quite consciously entered into the lease without a break clause"; and negotiated alienation provisions defining the circumstances in which it could depart the premises, he said.
"By this, I do not mean to say that the [UK's] withdrawal from the [EU] was in any way anticipated or in the contemplation of the parties, and that therefore the risk of the consequences of the [UK's] withdrawal was to be allocated to the EMA," he said. "However, I do consider that it was foreseeable that over this long period of time, there might be some development that would require the EMA involuntarily to have to leave the premises due to circumstances beyond its control."
"I accept – as anyone would – that the withdrawal of the [UK] from the [EU] is a seismic event, and I have found that it is not one that was in the contemplation of either party at the time the agreements were concluded. However, the involuntary departure of the EMA from its headquarters in the premises, due to circumstances beyond its (or, indeed, the [EU's]) control was something which – on the face of it – the lease expressly provided for," he said.