Reusch v Canary Wharf: Lease Frustration in the Context of Brexit

Reusch v Canary Wharf (BP4) T1 Ltd & Ors: Lease Frustration in the Context of Brexit

Introduction

The case of Reusch v Canary Wharf (BP4) T1 Ltd & Ors ([2019] EWHC 335 (Ch)) before the England and Wales High Court (Chancery Division) pertains to a dispute over the frustration of a lease agreement due to the United Kingdom's withdrawal from the European Union, commonly known as Brexit. The European Medicines Agency (EMA), an agency of the European Union, held a 25-year underlease of part of Canary Wharf, provided by Claimants collectively known as Canary Wharf (CW). In August 2017, the EMA informed CW via letter that it would consider Brexit as an event that frustrated the lease, thereby seeking legal clarification to this effect.

Summary of the Judgment

The High Court was tasked with determining whether the lease between CW and EMA was indeed frustrated by Brexit. To establish frustration under English law, a supervening event must render the contractual obligations impossible, radically different, or both, without the fault of either party. The court analyzed whether Brexit constituted such a supervening event that frustrated the lease. After detailed examination, the court concluded that the lease was not frustrated by Brexit. The Lease contained provisions anticipating the possibility of the EMA needing to assign or sub-let the premises due to changes in circumstances, and the Withdrawal Agreement with the UK did not trigger a termination of these lease obligations. Therefore, the EMA remained bound by its obligations under the Lease, including the payment of rent.

Analysis

Precedents Cited

The judgment extensively referred to precedents to elucidate the application of the doctrine of frustration in English law. Notably, cases such as Davis Contractors Ltd v Fareham UDC, which established the general test for frustration, and Krell v Henry along with Herne Bay Steam Boat Co v Hutton, which addressed frustration of common purpose, were pivotal. These cases underscore that frustration occurs only when performance becomes radically different from what was initially contracted, not merely due to increased difficulty or expense. Additionally, cases like The Super Servant Two tackled self-induced frustration, where a party’s actions precluded the possibility of fulfilling contractual obligations, further informing the court’s considerations.

Legal Reasoning

The court embraced a multi-factorial approach to assess frustration, considering both the terms of the contract and the context in which it was made. It scrutinized whether Brexit rendered the performance of the Lease radically different from the original bargain. The Lease had clear covenants allowing the EMA to assign or sub-let the premises if it could no longer use them due to changes like Brexit. The court found that the Lease's provisions effectively allocated the risk of such events, indicating that both parties had considered the possibility, albeit not specifically Brexit. Moreover, the court determined that supervening illegality, in this case, Brexit, did not meet the threshold for frustration as it did not strip the lease of substantially all benefits to the EMA or render the obligations impossible beyond the terms expressly provided for in the Lease.

Impact

This judgment solidifies the strict interpretation of the doctrine of frustration within English contract law, particularly in the realm of commercial leases. It highlights the necessity for contracts to include comprehensive risk allocation mechanisms, acknowledging potential political and economic shifts that could impact contractual performance. For future cases, especially those involving long-term leases with multinational elements, parties must ensure that lease agreements are robust against various eventualities, including significant geopolitical changes like Brexit. Additionally, this ruling serves as a precedent that mere significant adverse changes, without the abolition of the contract's core purpose or the removal of all benefits, do not constitute frustration.

Complex Concepts Simplified

Doctrine of Frustration

The doctrine of frustration in English law allows for a contract to be discharged if an unforeseen event occurs after the formation of the contract, making its performance impossible or radically different from what was agreed, without the fault of either party.

Supervening Illegality

Supervening illegality refers to an event that makes the continuation of contractual obligations illegal after the contract has been formed. For frustration, this event must significantly alter the contractual obligations, beyond a mere inconvenience or increased expense.

Common Purpose

Common purpose involves an overarching shared objective that underpins the contract. Frustration of common purpose occurs when this shared goal is thwarted by an event, making the contract's execution meaningless.

Self-induced Frustration

Self-induced frustration arises when a party to the contract, through its own actions or negligence, renders the contractual obligation impossible to fulfill. This typically precludes using frustration as a defense.

Conclusion

The judgment in Reusch v Canary Wharf (BP4) T1 Ltd & Ors reaffirms the stringent criteria required for a contract to be considered frustrated under English law. The court's decision underscores that contracts, particularly commercial leases, must encompass comprehensive risk allocation provisions to manage unforeseen events effectively. Brexit, while a substantial geopolitical shift, did not meet the high threshold necessary to frustrate the lease because the contract already provisioned for such a possibility through assignment and sub-letting clauses. This case serves as a critical reference for drafting resilient contracts that can withstand significant external changes without necessitating judicial intervention or discharge. Moreover, it delineates the boundaries of the doctrine of frustration, ensuring that only contracts fundamentally disrupted in their core purpose or feasibility are rendered void, thereby promoting contractual stability and predictability in the face of uncertainty.

Case Details

Year: 2019
Court: England and Wales High Court (Chancery Division)

Judge(s)

THE HONOURABLE MR JUSTICE MARCUS SMITH

Attorney(S)

Ms Joanne Wicks, QC, Lord Anderson of Ipswich, KBE, QC, Mr Jonathan Chew and Ms Zahra Al-Rikabi (instructed by Clifford Chance LLP) for the ClaimantsMr Jonathan Seitler, QC, Mr Thomas de la Mare, QC, Ms Emer Murphy and Mr James Segan (instructed by DLA Piper LLP) for the Defendant

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