Commercial Property: Are You Frustrated by Brexit?
Lawyers often wish for a crystal ball: our jobs require us to try and foresee problems in business relationships which can run into many years. If we’re drafting a lease, we’re trying to anticipate issues which might arise between the Landlord and the Tenant, without knowing the context in which that drafting might be construed.
We need to strike a balance between drafting a document so watertight that there is no ability for the parties to adapt and move with the times, and one which is too flexible and allows the opposing party lots of ‘wriggle room’ or insufficient clarity.
With so much uncertainty as to what the future holds, trying to anticipate the issues which could be faced by contracting parties 5 or 10 years down the line is particularly difficult at the moment.
We have started to see ‘sweeper’ clauses creep into commercial contracts – such as insurance policies – which try to make it possible for a party to walk away where, for example, Brexit makes performance of the contract impossible, illegal, or even just financially unviable.
Wherever ‘changed circumstances’ are an issue, drafting needs to be carefully thought through. Ideally we can apply the ‘if x, then y’ rule so everyone knows where they stand, but there is always the chance that an event occurs which no one could have reasonably anticipated.
Property documents such as leases, sale and option agreements are still subject to the general principles of contract law – which means if they are too open-ended they can be ‘void for uncertainty’. We’ve seen plenty of recent examples of clauses which essentially state that if something doesn’t go according to plan, the parties can simply renegotiate. Provisions like these need to be very carefully drafted. The circumstances which allow for renegotiation, and the rules of those renegotiations, would need to be clearly defined in order to be enforceable.
What should you do about your current contracts?
The first rule of thumb is that ‘do nothing’ is always an option. It may be appropriate if all your contractual relationships are short term and can be easily adapted, or where there are penalty-free break provisions so that new contracts can be put in place.
However, all contracts should be reviewed carefully. If they don’t contain Brexit provisions, there’s a possibility that you may be bound to honour the contract even when it is no longer in your interests.
It may be appropriate to include a ‘Brexit Clause’, i.e. a requirement that in certain circumstances, the parties will be required to renegotiate certain elements of the contract – for example the timing or calculation of payments that fall due periodically.
What will work in Court?
We have recently had an indication from the High Court as to how Brexit may impact on some contracts in the case of Canary Wharf – v- EMA. The case relates to a 25 year lease of premises in England held by the EMA (European Medicines Agency).
The EMA claimed that the contract – the lease – should be terminated due to the legal principle of ‘frustration’, that is, the contract could no longer be properly performed so should be terminated.
The EMA quoted several grounds on which it claimed ‘frustration’, including loss of protection of various EU treaties and the EMA’s inability to use the premises legally for the intended use.
Whether or not a contract is frustrated is a very strict legal test and the High Court had to consider whether there had been an event subsequent to the signing of the lease which meant that performance of the contract would be “radically different” than anticipated.
The High Court took the sensible approach that, as it was not yet clear what Brexit might actually mean, they would assume that we would have a ‘no deal’ UK exit – which was then still a viable option. While this wasn’t labelled a ‘worst case scenario’, it was considered to be the one which would “most likely to produce an answer that will be helpful to the parties”.
It was agreed that the EMA would be “materially and adversely affected”. However, the Court did not go so far as to say that Brexit would frustrate the lease.
The judge concluded that Brexit was not foreseeable when the lease was signed and the event was ‘seismic’. But (partly due to the 25 year length of the lease) the Tenant had taken on the risk that circumstances would change. The EMA could continue to use or dispose of the premises and could continue to pay rent (in that it was not prevented from paying rent by law)
It didn’t help EMA’s case that:
- The lease did not contain break provisions, although the Court claimed it was reasonably forseeable that there might be some change which would require the Tenant to quit the premises ‘due to circumstances beyond its control’ which might have led the Tenant to insist on a break clause; and
- The possibility of EMA leaving the premises by way of assignment or subletting was anticipated. Mr Justice Marcus Smith saw that the lease anticipated that the EMA might (and, as a matter of law, could) ‘entirely divest itself of the Premises’ in that assignment or sub-letting of the whole of the Premises was expressly contemplated and provided for.
Tensions and anxieties are clearly running high as the UK’s future relationship with the EU remains unclear, but on this point we have a definitive ruling from the High Court: frustration due to Brexit can’t be argued in a court of law, so alternative drafting will need to be considered and applied.