Flexibility in leasing arrangements
Posted on July 8, 2019
Taking a new lease on business premises is a highly important transaction and our current uncertain political landscape makes forecasting space requirements during a lease’s fixed term particularly challenging.
A situation where the need for space reduced during a fixed term was recently considered by the High Court when it was asked whether Britain’s leaving the EU could frustrate a lease. Could an event unforeseen when a lease was entered into render it radically different from the contract entered by the parties and leave it frustrated, absolving all parties of future obligations and liabilities?
In the case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency  EWHC 335 Ch;  EGLR 17 the High Court stated that the 2016 Brexit vote did not frustrate a lease granted in 2014 for 25 years. After the vote, the EU decided to relocate the European Medicines Agency (EMA) to Amsterdam on the basis that its HQ should be located in a member state, such that the EMA no longer required the premises.
Currently, the legal position is that, in order for a contract to be frustrated and so treated as terminated, releasing the original contracting parties from future obligations and liabilities under it, it must be shown that the purported frustrating event:
- occurred after the contract was entered into;
- was not due to the fault of either party;
- goes to the root of the contract, rendering it radically different from that which the parties entered into;
- was beyond the parties’ contemplation when the contract was entered into;
- rendered performance of the contract either impossible or illegal.
The High Court decided that there was common purpose between the parties and agreement that the premises would be developed specifically for the EMA but that, whilst there was no agreement as to the circumstances in which the lease would come to an end, maintaining a headquarters outside an EU state was clearly legal. There was thus no frustration of the lease contract. The EU is appealing the High Court judgment, and this will be heard in Q1 of 2020.
So, for business decision-makers, what are the key matters to consider in building flexibility into leasing arrangements:
Length of term
Consider shorter terms to make commitments less onerous. Five year terms are becoming increasingly common.
Usually with the landlord’s consent, assignment makes it permissible to find an assignee to occupy the space and assume obligations under the lease.
Underletting of the whole or part.
It is unusual to see underletting of part, unless it relates to a part of a property which can be easily sub-divided, such as a whole floor. The relationship of landlord and tenant remains, so it will be important to ensure that the undertenant is financially sound. It may be possible to enter into an underlease with flexible terms. This effectively offsets obligations under the lease, which otherwise remains fully in force.
It may be possible to agree a break clause designed to bring a lease to an end before its term expires. Breaks can be mutual or unilateral, on a fixed date or a rolling break, usually after some of a lease term has run.
As the law currently stands the doctrine of frustration is of limited application so, when entering into a lease, current and projected requirements for accommodation should be considered carefully. With these in mind, the terms of a lease should be set out to allow for appropriate flexibility.
Be sure to take advice from experienced, specialist commercial property lawyers: easy to say “we would say that wouldn’t we?”, but false economies abound in this complex field and can be particularly irksome when corner-cutting results in unforeseen costs that can be truly material to business cash flow and prosperity.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.