The European Medicines Agency (EMA) is an anchor tenant in Canary Wharf. In 2011, EMA entered a 25-year lease for its London headquarters with the Canary Wharf Group. It is understood that EMA is required to pay rent of approximately £14m per year and has an outstanding liability for the remainder of the term of around £400m (including service charges and rates).
Following the UK’s decision to leave the European Union on 29 March 2019, EMA announced that it will relocate its headquarters to Amsterdam, the Netherlands, where it will take up its operations on 30 March 2019.
Although EMA intends to relocate, according to the Canary Wharf Group, it must still continue with its obligations under the lease as it does not have an early break clause (a provision allowing EMA or the Canary Wharf Group to end the lease early).
EMA, on the other hand, says that Brexit will frustrate the lease and it will no longer be able to comply with its obligations under the lease, which expires in 2039. Even though it does have an option to assign the lease (transfer the lease to another party), EMA would still be residually liable until the lease expires. It is a situation EMA is trying to avoid.
How can a lease be frustrated?
The doctrine of frustration states that a contract may be discharged if something occurs after the commencement of a contract that makes it impossible to fulfil it or makes the obligation a completely different obligation to the one entered into the contract.
It is accepted that in rare cases, the doctrine of frustration can apply to leases. In practice, however, the last such case in England was reported in 1903 when Mr Krell agreed to let a flat on Pall Mall to Mr Henry to see the coronation of the King Edward VII and Queen Alexandra in 1902, which was unfortunately delayed due to the King’s ill health.
The facts of the case were that parties agreed on a price of £75 for the use of the flat for two days when the coronation was due to take place. Mr Henry paid a £25 deposit with the remaining £50 to be paid at a later date. The coronation ceremony was not mentioned anywhere in their agreement. The coronation did not take place on the planned date and Mr Henry refused to pay the outstanding £50.
Mr Krell sued Mr Henry for the outstanding balance and Mr Henry countersued to recover his deposit. The Court held that there was an implied condition in the contract and gave judgment for Mr Henry on both the claim and the counterclaim. Mr Krell appealed and the Court of Appeal dismissed the appeal.
The Court of Appeal held that a condition (in this case, the timely occurrence of the coronation) does not need to be explicitly mentioned in the agreement but may be inferred from the circumstances surrounding the contract.
What does this mean?
EMA says that Brexit was not foreseeable at the time when it entered into the tenancy. The consequences of the UK leaving the EU are far-reaching and very significant to EMA’s operations and its obligations as the tenants under the lease.
A trial has been set to take place in January 2019 and the Court will have to determine whether Brexit was as unforeseeable as the King’s appendicitis in 1903. The doctrine of frustration has a very narrow scope and the Courts have been consistent in not widening it. Litigation, however, is very unpredictable and if EMA wins, it is very likely that many other tenants will follow suit.
Finally, there is also a possibility of the EU seeking to pass laws which would make the performance of the tenancy to be outside the scope of the EMA. This would make the tenancy unlawful according to EU law.
However, depending on the UK government’s agreement with the EU, the UK may not be subject to EU law at the time the case is decided. It is, therefore, unclear how this would affect the tenancy and it may be up to the Courts to determine the effect these laws would have on the lease.
This will be a very important and highly observed trial that will potentially determine how much financial loss, if any, landlords will suffer as a result of Brexit.