The EMA, an agency of the European Union, took out a 25-year lease on 21 October 2014 in respect of premises in Canary Wharf. On 2 August 2017 it wrote to the landlord stating that "if and when Brexit occurs, we will be treating that event as a frustration of the lease".
Although the question of frustration is specific to the terms of the lease and the nature of the EMA as an agency of the EU, the methodical approach taken by Marcus Smith J is instructive in how the English courts are likely to approach the question of frustration by Brexit.
Which flavour of Brexit?
The mere fact of the UK's triggering of Article 50 is unlikely to be a frustrating event – the supervening event causing frustration is the UK's withdrawal from the EU, with its consequent changes to law or circumstances.
Usually the court will only assess whether frustration has occurred with hindsight. However, the court recognised that Brexit presents an unusual situation where, although the frustrating event lies in the future, it is beneficial for the parties' rights to be determined in advance in order that they can make necessary preparations. The difficulty was making an assessment when the form that Brexit may take is uncertain.
The court's approach was first to address a "no deal" Brexit scenario, where there is no further agreement ameliorating its effects. If "no deal" Brexit would not frustrate the lease, then it follows that any softer Brexit will have less stark an effect and will not frustrate the lease either. If a "no deal" Brexit would frustrate an agreement, the court would then need to assess other potential outcomes beyond 29 March 2019, including extension of the Article 50 deadline and withdrawal of the UK's Article 50 notice.
The court made several findings that will apply generally to EU agencies with a presence in the UK:
- A "no deal" Brexit would result in the loss of immunities and protections under Protocol 7 of the Treaty of the European Union and the Treaty on the Functioning of the European Union. The court found that "the Protocol 7 protections are extremely important". This justifies EU agencies relocating out of the UK in the event such protections are lost.
- The court will look specifically at an agency's legal capacity to act as contractually required. For example, acting as a commercial landlord may be unrelated to the EMA's functions and choosing to venture into that area may be ultra vires. However, where it had properly entered into a lease, the court rejected the argument that it lacked capacity to pay rent or to dispose of the premises.
- An EU agency being headquartered outside of the EU may be unusual and even undesirable. However, there is no customary rule of public international law to this effect and an EU agency does have the capacity to enter into such an arrangement, including the payment of rent.
An agreement can be frustrated by supervening illegality where performance becomes illegal. English law also recognises the relevance of foreign law where it affects the capacity of a party to enter into an agreement.
However, these do not apply in concert to extend the law of frustration to cover supervening events where foreign law makes it illegal to perform obligations that have already been assumed under a contract that was lawfully entered into.
For a supervening event to frustrate a contract, it must remove all or substantially all benefit that one party receives from a contract. Even if the EMA was unable to use the rented premises itself, the ability to sublet or otherwise dispose of them would prevent frustration of the lease. It follows that, if Brexit simply changes where a product can be sold without removing the market entirely, there will be no frustration.
Where proper construction of the contract does not demonstrate frustration, parties may still be able to look outside the contract to a common purpose behind the bargain that is thwarted by the withdrawal of the UK from the EU. However, this will be narrowly construed. Although the EMA's purpose in obtaining a lease may have been for use as an EU agency, the court found no common purpose outside the terms of the lease. The landlord had no interest in the specific occupant or the specific purpose of use, only the income generated.
What can be done with new or existing contracts?
In respect of new contracts (and likely any contracts concluded after the referendum), Brexit cannot be said to be an unforeseen possibility, notwithstanding that it may have a major impact upon the operation of a contract.
Parties should review their major contracts and consider a bespoke Brexit clause to address what should happen in the event of various forms of Brexit. To be effective, such clauses require a clear trigger event, such as:
- the revocation of a specific law or regulation that is fundamental to the contract; or
- a fluctuation in costs, prices or tariffs above a specified level.
To read more articles related to this topic or to view other know-how material relevant to dispute resolution please visit our dedicated know-how portal Disputes+.
 London and Northern Estates Company v. Schlesinger  1 KB 20