Frustration of leases: Brexit and illegality

Introduction

This is the second post about Canary Wharf (BP4) T1 Ltd v European Medicines Agency ([2019] EWHC 335) in which Marcus Smith J considered the claim of the European Medicines Agency (‘the EMA’) that Brexit (should it occur) would be an event that would frustrate the EMA’s lease of its office premises in Canary Wharf.

The first post outlined the facts and Marcus Smith J’s account of the doctrine of frustration. This post looks at the EMA’s argument that performing its obligations under the lease would be illegal after Brexit and that the lease was frustrated on that account.

The EMA’s argument on illegality

Marcus Smith J explained that:

‘The EMA’s contention that the Lease was frustrated by supervening illegality, taken at its highest, involved the proposition that, after withdrawal of the United Kingdom from the European Union, it would no longer be lawful for the EMA to pay rent to CW pursuant to the Lease. The payment of rent would be unlawful because the EMA would – in paying rent – be acting ultra vires or without capacity’ ([96]).

Essential points about supervening illegality

The earlier post outlined Marcus Smith J’s account of the law on supervening illegality. Briefly:

  • illegality arising under foreign law does not frustrate a contract;
  • ‘for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract.’ ([195])
  • the frustration must not be self-induced.

Assumptions favourable to the EMA’s case

Marcus Smith J. assessed the EMA’s case on the following assumptions:

  • that illegality under foreign law was relevant to frustration under English law;
  • that, following Brexit, it was ultra vires the EMA, and therefore illegal, for it to continue to perform its obligations under the lease.

London and Northern Estates Company v. Schlesinger

Marcus Smith J referred to the Court of Appeal decision in London and Northern Estates Company v. Schlesinger ([1916] 1 KB 20) where an Austrian subject took a lease of a flat. When war broke out, restrictions were introduced prohibiting enemy aliens from living in the area in which the flat was located. The Court of Appeal held that this supervening illegality did not frustrate the lease.

Marcus Smith J commented:

‘the primary basis for the decisions of Avory and Lush JJ is illuminating: for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract. Thus, Avory and Lush JJ both stressed that not only did the lease continue, but also that the defendant was entitled to sub-let or indeed lend the flat to his friends. In short, the fact that the defendant was himself precluded from occupying the flat was not nearly enough to render the lease frustrated.’ ([195])

Application to this case

If it were accepted that the supervening illegality deprived the EMA of any ability to use the premises then the lease would be frustrated. For this to be true, it would need to be the case that it was ultra vires the EMA to occupy, assign, sub-let or share possession of the property ([198] – [199]). The lease would also be frustrated if it were assumed that EMA’s payment of the rent was ultra vires ([200]). Making these assumptions (and that illegality under foreign law is relevant) then Brexit did frustrate the lease.

Self-induced frustration

Even if the supervening illegality did frustrate the lease it is still relevant to ask whether the frustration is self-induced.

Marcus Smith J explained:

‘When considering whether there has been a frustrating event, it is quite clear that the courts consider the conduct of the party alleging frustration broadly and ask the broad question of whether the supervening event was something beyond that party’s control or within it. “Self-induced frustration” is something of a misnomer. It is simply a reference to post-contractual events and actions which indicate that certain options – that might have ameliorated the frustrating event – have been closed off by the acts or omissions of the party claiming frustration.’ ([206])

Here the frustration was self-induced:

‘(3) The fact is – as evidenced by the provisions of the Withdrawal Agreement – that the European Union could have done more than simply baldly ordering the relocation of the EMA (by way of the 2018 Regulation) and focussing only on the progress of the establishment of the EMA’s new headquarters in Amsterdam (which is what the 2018 Regulation does). The 2018 Regulation could have gone further, regarding the winding down of the EMA’s position in the United Kingdom. It could, for example, have included provisions along the lines of Article 119 of the Withdrawal Agreement.’ ([206])

The EU’s failure to confer capacity on the EMA to make use of the right to assign or sub-let the lease was a choice that it had made. It was this choice that gave rise to such illegality as existed. The lease is not frustrated by this illegality ([207]).

Michael Lower

 

 

 

 

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