Court says no to Brexit get-out leaving tenant frustrated

Canary Wharf Group v The European Medicines Agency (EMA) has been the most eagerly anticipated case of the year so far with commentators predicting serious ramifications for the property industry if the EMA succeeded. The industry will however now be breathing a huge sigh of relief as the High Court gave short shrift to the EMA’s request that the court effectively tear up its lease in light of Brexit. 

In this widely reported case, the EMA agreed, in 2011, to take a 25 year lease at an annual rent of circa 17.5 million Euros without a break option.  As an EU agency, the EMA took the decision to relocate to another member state following the UK’s decision to withdraw from the EU. The EMA has moved its headquarters to Amsterdam but continues to pay rent on very expensive office premises in Canary Wharf.

The EMA argued that, as an agency of the European Union, it was constitutionally impossible for it to remain headquartered in the UK after Brexit and therefore the lease had been ‘frustrated’ on either of the following grounds;

1. Firstly, that the effect of Brexit meant that, as a matter of its constitution, the EMA would be unable to continue leasing premises in a country which (after 29 March 2019) would no longer be a member state, and that meant the lease should therefore come to an end; or
2. Secondly, that Brexit was an unforeseeable event that neither party anticipated when the lease was entered into such that the ‘common purpose’ of the agreement had been frustrated, and the EMA should be released from its obligations under the lease.

Frustration occurs where the law recognises that something has happened, which is beyond the parties’ control, which makes the deal they made so radically different that neither party should be bound by it. There have only been a few (historic) cases in the UK courts where a lease has been ‘frustrated’ and courts have been very reluctant to follow them. This is not surprising as the effect of frustration is to ‘kill off’ the contract so that both parties are released from their obligations completely from the time at which the frustrating event took place.  

Turning to the first of the grounds, the judge rejected with some confidence EMA’s position that it does not have the legal capacity to perform its obligations under the lease after 29 March 2019. Whilst the judge accepted that the EMA had very good reasons for wanting to move its headquarters post-Brexit, it did not accept that it was legally bound to do so.

As to the second ground, although the judge accepted that Brexit was not particularly foreseeable in 2011, this was not sufficient to release EMA from its obligations. The parties had specifically negotiated a lease which enabled early disposal.  In particular, as most leases do, the lease allowed the tenant to assign or sublet, subject to certain conditions being satisfied. So whilst the EMA made a deal to take a long lease of a bespoke building without a break option, it clearly wasn’t beyond EMA’s contemplation that it might at some point in time need to move out. 

Implications of the judgment

The property industry will welcome the certainty that this decision offers.  Tenants will not be able to ‘cry frustration’ to avoid their lease obligations which have become more expensive or more difficult to perform after Brexit.  

On the flip side, there are still uncertain times ahead. Tenants may expect to be offered flexibility in their leases until the reality of Brexit is better understood. This could include tenants demanding shorter terms, rolling breaks and even investors/landlords sharing the ‘Brexit risk’. However, concessions may not be forthcoming and if a tenant’s business is closely aligned to the outcome of Brexit, it should think very carefully before committing to onerous lease obligations without taking professional advice. 

As for the EMA, the battle against the Canary Wharf Group may not yet be over. The EMA has already shut up shop in the UK, and is paying substantial liabilities of around £1million a month. It will therefore not come as a surprise if a leapfrog appeal to the Supreme Court is pursued. The court has very imaginatively given the EMA until 29 March 2019 to make its application. 

If you would like further information or advice in connection with lease liabilities please contact a member of the Real Estate Disputes team at Stevens & Bolton LLP.