My colleague Abilene Singh has written another casenote about a recent UK decision on the frustration of leases, which I have set out below. The decision is not inconsistent with other recent cases referred to in earlier posts on this blog.
Readers are particularly referred to Ms Signh's 'writer's comments' at the end of her note.
The Hong Kong case referred to in my earlier post today suggests that the duration of the required closures compared to the balance of the lease term is relevant. This case suggests that:
1. closures would need to be complete (or close to it) to frustrate a lease; and
2. restrictions that allow a tenant to continue trading, albeit in a restricted fashion, might make the tenant's argument more difficult.
Ms Singh’s note is as follows:
Canary Wharf (BP4) T1 Ltd v European Medicines Agency  EWHC 335 (Ch)
UK Supreme Court, Marcus Smith J.
· The tenant was an agency of the EU, which held a lease for premises in Canary Wharf, London, for a term of 25 years from August 2011.
· On 29 March 2017 the UK gave notice under the EU Treaty of its decision to withdraw from the EU.
· On 2 August 2017 the tenant wrote to the landlord stating it considered that withdrawal would be treated as an event frustrating the lease.
· The landlord commenced proceedings and sought a declaration that the withdrawal by the UK from the EU would not frustrate the lease.
· The tenant argued that the UK’s withdrawal from the EU would frustrate the lease because:
o it would lose certain privileges and immunities under Protocol 7 and the EU Treaty;
o it could no longer lawfully be located at the premises;
o it could no longer lawfully exercise the rights conferred by the lease, including the right to assign; and
o as a result of the above, it couldn’t met its obligations to pay rent.
· The legal basis for the tenant’s argument was that the lease would be frustrated by:
o supervening illegality; or
o frustration of common purpose.
· The landlord disputed the above and argued that Brexit would not frustrate the lease.
· A distinguishing point between this case and the present health crisis is that the event said to frustrate that lease lay in the future in that Brexit had not occurred at that time. Having said that, Smith J proceeded from the starting point that the UK would withdraw without further agreement from EU on 29 March 2019.
Supervening illegality and frustration
“… frustration occurs whenever the law recognises that without default of either party a contractual obligations has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract… it was not this that I promised to do.”
“Frustration of a contract takes place where there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances: in such case, the law declares both parties to be discharged from further performance.”
· Smith J surmised that:
“Whether a contract is frustrated depends upon a consideration of the nature of the bargain of the parties when considered in the light of the supervening event said to frustrate that bargain. Only if the supervening event renders the performance of the bargain “radically different”, when compared to the considerations in play at the conclusion of the contract, will the contract be frustrated.”
“In some cases, the supervening illegality has no effect at all on the enforcement of contractual obligations;64 in others, it renders the contract unenforceable by one party or the other but leaves the rest of the contract standing and enforceable;65 in yet others, neither party will be able to enforce the contract. In some cases, supervening illegality will cause the contract to be frustrated, but not in all.”
· Smith J made preliminary findings, including that:
o The premises leased by the tenant were bespoke commercial premises. At the time of lease negotiations, the premises had yet to be constructed and had subsequently been built to the tenant’s specifications.
· Helpful consideration of supervening illegality is set out at -.
o the tenant did not lack the vires (i.e. power) to continue its obligations, such as payment of rent, under the Lease;
o even if it did lack capacity, because that related to illegality under a foreign law, namely the EU law, this was not a matter that regard ought be had. The frustration is to be determined having regard to the law of the place of performance, the UK;
o he upheld the ratio in Schlesinger namely that:
· in consideration of whether the frustration was ‘self-induced’ by the tenant, he found that the legal effects on the tenant of Brexit could have been ameliorated by the EU and therefore that this ‘renders the frustration of the Lease self-induced.’
Common purpose frustration
“… the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.”
· Therefore, Smith J stated that the question in this case was:
‘whether there can be said to be a common purpose as between the EMA [tenant] and CW [landlord], at the time of the Agreements, going beyond what was agreed upon in the Lease, which has been rendered radically different by supervening events.’
· Smith J found that in this case there was no common purposes. He said:
“The Lease provided for the circumstance where the tenant may abandon its headquarters at the Premises. That outside the terms of the Lease, the parties’ purposes were not common. The tenant focussed on bespoke premises, flexibility re term of the lease and lowest rent payable vs. the landlord fixed on long-term cash flow at the highest rate. Therefore, no common purpose different to that set out in the Lease.
· This case and in particular the decision regarding supervening illegality can be distinguished from the almost inevitable position of commercial tenants arising from the Covid-19 health crisis. Smith J made a number of findings against the tenant, including that it could still lease the premises in the UK (although undesirable to have EU premises in a non-member party state) and that if it did so, following Brexit, that certain privileges and immunities to the EU tenant would not be completely obliterated by virtue of Brexit. These findings operated in a way to lessen the commercial impact of the alleged illegality, if not completely void that argument altogether.
· In the case of Covid-19 and closure of certain non-essential businesses, such laws might be considered a supervening frustrating event of illegality in that:
o it may prohibit the permitted use of a demised premises in the way envisaged at the commencement/at the time of entering the lease;
o it may affect an innocent third-party who cannot ameliorate the effects of the law (unlike an EU agent such as the tenant in the above case);
o depending on the timing of entering the lease, it is not reasonably foreseeable that such a pandemic would occur; and
o it is not ‘self-induced’ by the tenant.
· However, ‘carve outs’ in the prohibition against trading of non-essential services may be material. For example, restaurants and cafes may be permitted to provide take-away or home delivery services. In order to frustrate a lease, all or substantially all of the benefits have to be lost, which may not have occurred if limited use of the property can still be made.