Brexit and ending contracts and leases by “frustration”

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. No liability is accepted by the author or Sykes Anderson Perry Limited in respect of this article. Law is a complex subject and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

Brexit is already having an impact on business and it is inevitable that there are going to be commercial casualties however it unfolds. Companies will seek to extract themselves from contracts and leases which have become unprofitable for them. There is a legal doctrine of “frustration” which is seldom used in the courts but we will probably see a lot of it shortly. In civil law countries it is similar to “force majeure” or external events neither contracting party had considered at the time which change the whole basis upon which a contract was entered into.

The key point of this article is that if you have a lease or contract going back to before the Referendum result then do not renew it or vary it without considering the effect Brexit could have on your business and whether you want to escape from the lease or contract.
Includes getting out of leases

A party to a contract, which could include a lease of premises, could argue that when they signed the contract/lease they had no idea that the UK would leave the EU and that the whole basis of their business and the contract was based upon the UK being within the EU. They will say that before David Cameron announced the Referendum the thought of Brexit was at best outlandish, a fringe view which would never happen.

The most common long term contract businesses enter into is leases of premises. If Brexit makes it unprofitable for the business to remain in the UK the business will normally want to terminate the lease rather than find a new tenant. This has already happened with the European Medicine Agency lease at Canary Wharf London following its departure to Amsterdam. The Agency has a £500 million outstanding lease rental commitment which it is seeking to avoid on the grounds of frustration.

Recent English case

In a recent case The Flying Music Company Limited v Theater Entertainment the English court considered the law of frustration. The facts were that The Flying Music Company Limited a theatrical productions company started talks in 2010 with the defendant, Theater Entertainment, about taking the show to Greece. In April 2010 they started selling tickets for shows, with performances in June 2010. The austerity programme started in Greece at the same time with disruption and violence in May and June. Ticket sales were bad and the defendant could not make the payments under the contract with the Claimant. The Defendant said that the contract had been frustrated because the extent of the problems in Greece could not have been foreseen.

The court disagreed and decided that already in April 2010 it was obvious there would be trouble in the country and the defendants knew this when they signed the contract.

The court said “frustration” only applies if (a) performance under the contract becomes impossible or becomes “radically different" from what was reasonably contemplated at the outset (b) it occurs after the contract was signed and (c) it was not caused by the fault of either party.

Applying this to Brexit

In order to escape from a contract you will have to show it has become impossible to carry it out or that it has become radically different. This could be for financial reasons, regulatory reasons, commercial reasons or staff reasons.

Financial reasons

If this is only because tariffs start to apply it may be difficult to convince a court. It will depend on the level of tariffs which now apply. The court may say that small increases in tariffs are not enough to make a significant difference. It is however likely to take the view that VAT becoming payable when previously the supply was zero rated is enough.
It may apply if the company’s market has completely changed say through new competitors from outside the EU entering the market.

Regulatory reasons

If you were conducting business in Europe relying on being regulated in the UK and having “passporting” rights then frustration is more likely to apply. For instance a UK insurance company providing cover to a business in the EU may no longer have the right to provide this service after Brexit. If the EU business has to pay more to get local cover then the UK insurance company can probably say the contract was frustrated provided the contract was entered into before the Brexit referendum announcement.

Commercial reasons

There will be a host of reasons here. One example is a UK business involved in the distribution of Irish agricultural produce through the UK into the EU. If border controls with Ireland and customs delays mean this ends and all products are instead moved by sea from Ireland to Belgian ports bypassing the UK, then any contracts the UK Company has are likely to be frustrated.

Staff reasons

This has already started. A UK farm business which is unable to recruit EU migrant workers to harvest produce will not be able to perform a contract to supply a supermarket and could not be held liable to the supermarket for increased costs in sourcing elsewhere.

Timing

This could be tricky. If you entered into the contract after the referendum result was announced then you will be in a very weak position. From this date you will be viewed as being aware that there will be business consequences from Brexit even though there was no detail. This may also apply from the date David Cameron announced the referendum though this is less likely as the general view was that a “Leave” win was very unlikely.

The key point is that if you have a contract going back some time, do not renew it or enter into any amendment of it. For instance if you have a lease of business premises going back a few years now is not the time to assign it to another company within your group or sign any deed of variation.

Personal reasons

It is likely individuals will seek to get out of assured shorthold tenancies on grounds of Brexit. This may be because their jobs have ceased to exist. It is hard to predict what will happen here.

August 2018
David Anderson