Could Brexit frustrate a lease?

The possible impact of Brexit on leases
Brexit seems to be all we hear about these days, no matter what field you work in. There is still so much uncertainty but certain topics have already been brought before the courts. One question that has recently been considered is whether or not a lease could be terminated on the ground of frustration following on from Brexit.

What is the doctrine of frustration?
If something happens after a contract is formed which makes it impossible to complete the contract or if something turns the obligation to be performed into a radically different obligation then the contract can be discharged on the ground of frustration.

Why could this be an issue?
In 2011, European Medicines Agency (EMA) was granted a 25 year lease by Canary Wharf Group. The property is located in London but EMA subsequently announced that they would be relocating their headquarters to Amsterdam following Brexit. As there is no break clause in the lease, Canary Wharf Group stated that EMA will still be bound by the terms of the lease and will therefore have to continue paying rent as well as complying with their other obligations contained in the lease. EMA’s case was that Brexit would frustrate the lease and they should be allowed to bring the lease to an end.

A trial recently took place and the Court had to make a decision as to whether or not Brexit was foreseeable at the time the lease was granted and, if not, did this change the contract or the obligations contained within it so that the lease could be frustrated.

If the Court agreed with EMA then this could have opened up the door for many other tenants to use this as the basis for their own leases to be terminated early. Fortunately for the Landlord in this case, the Court did not agree with EMA and their lease will continue.

Outcome
From the Landlord’s perspective the outcome of the trial was very positive. They still have a tenant paying rent and covering the costs for their property. Obviously for the tenant, the outcome is less than ideal. Even if they are no longer using the property they will still have to pay the rent and other outgoings as well as ensuring that all other tenant obligations are complied with.

The importance of Break Clauses
As mentioned above, there was no break clause in this 25 year lease. There could be a number of reasons for this – at the time the lease was granted perhaps EMA thought that there would be no need for this as they had no plans to move or perhaps Canary Wharf Group would not agree to this. However, from a tenant’s perspective it is important to give full consideration to what could happen in the future. There will always be situations outside of our control and not everything is foreseeable but giving some thought to what terms could be put in place to protect you is always advisable. A break clause at one or more intervals during the term of this lease would have allowed EMA to bring their lease to an end early.

Property issues and Brexit
This is not the only issue which could arise following on from Brexit. There are many issues which may need to be reviewed once the UK has exited the EU. Many laws are currently in place which derive from EU regulations including Energy Performance Certificates and Minimum Energy Efficiency Standards. The truth is that we may not have a clear answer on many of these matters for some time now. However, if you do have any concerns relation to property, please do contact our property team who will be happy to discuss this further with you.

 

Update
EMA were given permission to appeal the decision and have since lodged their appeal. We will update you on any further developments on this case.