As businesses continue to grapple with Brexit and the uncertainty that it brings, the High Court this week delivered a ruling on whether or not Brexit could be treated as an event frustrating a lease.
The background of the Canary Wharf v EMA case
In October 2014 the European Medicines Agency (“EMA”) entered into a lease for its headquarters in Canary Wharf, London. The lease was for a period of 25 years, and contained no option for the EMA to break during the term. The remaining liability of the EMA under the term of the lease is approximately £500 million.
Following the decision of the UK to leave the EU, the EMA announced that it would be moving its Headquarters to Amsterdam. That move officially took place in January this year, although some of the EMA’s 900 staff still remain at Canary Wharf.
In August 2017 the EMA, with no ability to break its lease, wrote to its landlords to inform them that “when Brexit occurs, we will be treating that event as a frustration of the Lease”.
The landlords referred the matter to the High Court for an urgent determination and the Court ensured that Judgment was delivered before 29 March 2019 - the date that the UK will leave the EU.
The Legal Issues
In broad terms, a contract can be “frustrated” if an unforeseen event occurs, which renders it impossible or illegal for the contract to be performed or if the obligation to perform is transformed into something radically different. In such circumstances a contract can be discharged, releasing the parties from their obligations.
There has been some uncertainty as to whether a lease can ever be frustrated. However, it seems generally accepted nowadays that, in principle, a lease can be frustrated.
The fundamental question in this matter was, therefore, whether Brexit could frustrate the lease and allow the EMA to escape its ongoing obligations (and save around £500 million).
The High Court’s Decision
This always seemed like it would be an uphill struggle for the EMA to succeed. The doctrine of frustration is only ever likely to apply to a lease in rare circumstances. That said, this case has wider implications to the question of whether Brexit could frustrate other contracts.
Mr Justice Marcus Smith in the High Court has ruled that the Brexit will not frustrate the EMA’s lease.
The EMA had argued that it had “no choice” but to leave the UK as a result of Brexit. The EMA is an agency of the EU and Mr Justice Marcus Smith concluded that the legal effects on the EMA of the UK leaving the EU could have been, but were not, ameliorated by the EU. The “frustration” of the lease was, therefore, self-induced.
The EMA is therefore obliged to perform its obligations under the lease for the duration of its term. It may, of course, seek to assign or sublet the premises with the landlords’ consent.
This Judgment is perhaps not surprising, but will be welcome news in the property and legal market offering a little more certainty in times that seem anything but certain. The Judgment also has wider implications, as it indicates how the Courts may approach the issue of whether Brexit can frustrate other forms of contracts.
Given the sums involved under the lease, the EMA may seek to appeal the Judgment and may try to have the matter referred to the European Court of Justice. This is not necessarily the last we will hear of this matter.
The Judgment is, however, likely to deter others from seeking to pursue similar claims and does reinforce the fact that lease obligations are to be complied with. It is therefore important for all tenants to plan ahead and, when entering into a lease, consider that even the most unlikely of events can arise and may need to be addressed.
The Judgment also serves as a reminder that tenants should seek as much flexibility as possible within a lease with regards to alienation and break clauses.