The High Court has handed down judgment in the highly anticipated case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency.
Mr Justice Marcus Smith has determined that the UK's withdrawal from the EU will not constitute a frustrating event for the purposes of the European Medicines Agency's (the "EMA's") lease of 25-30 Churchill Place, Canary Wharf (the "Property"). The lease is believed to cost c.£500m over the duration of its 25 year term.
The principle of frustration is a rarely used legal doctrine. In summary, the doctrine of frustration enables a contract to be brought to an end when something unforeseen happens after the contract was entered into, that makes the contract either impossible to fulfil, or transforms the obligations into something radically different to those at the start. For a contract to have been frustrated, the event in question must be fundamental to the terms of the contract, and do more than simply make it less convenient or more expensive.
In October 2014 the EMA entered into its lease of the Property for a term of 25 years at a rent that is believed to be c.£12m per annum. Its landlord is Canary Wharf Group Plc ("CW").
By a letter of 2 August 2017, the EMA wrote to CW stating that:
"Having considered the position under English Law, we have decided to inform you that if and when Brexit occurs, we will be treating that event as a frustration of the Lease."
In essence this was because the EMA would have to relocate after Brexit so as to be in a Member State.
In response, and in order to achieve certainty for its shareholders and funders, CW applied to Court for a declaration that the UK's withdrawal from the EU would not cause a frustration of the lease, and that the EMA remained bound by its covenants under the lease for the remainder of its term. Amongst other things, CW argued that Brexit was foreseeable at the time the lease was entered into, and had been the subject of debate for some time.
The EMA's defences were numerous, including its contention that as an agency of the EU, it must have its headquarters within an EU Member State. Its case was the UK's withdrawal from the EU caused a frustration of the lease, either by causing a supervening illegality or frustration of a common purpose.
It argued that the performance by it of the lease covenants would be ultra vires after Brexit, as the UK's withdrawal from the EU would "trigger a number of legal changes relating to the EMA's legal capacity to continue with the Lease." On that basis, EMA said that even if Brexit could not be said to be a frustrating event, domestic law "must provide a remedy".
What did the court decide?
The Court concluded that EMA's lease will not be frustrated by the UK's withdrawal from the EU, either because of supervening illegality or frustration of a common purpose.
Mr Justice Marcus Smith found that:
- There were no constraints on the EMA's capacity or vires to perform the lease covenants which would cause the lease to be frustrated
- Even if the EMA was prevented by European law from being able to use the Property or perform its obligations under the lease, "such supervening illegality is not a matter that the English law of frustration takes into account"
- If the Court was wrong in relation to (a) and (b) above, this was a case where the legal effects on the EMA of the UK withdrawing from the EU could have been improved by the EU in the regulations it has passed to deal with the effects of Brexit. On that basis, the EU's failure to do so would be relevant to the question of frustration, as any frustration of the lease was self-induced.
EMA alleged that there was a common purpose between the parties of providing a European headquarters for the EMA. However the Court found that outside of the lease, there was no such common purpose between the parties, and that in fact their interests were divergent.
The EMA wanted bespoke premises, with the greatest flexibility as to term and at the lowest rent. In contrast, CW was interested in long-term cash flow, at the highest rate and where it was prepared to give the EMA some say in the buildings design. The parties agreed that EMA had the right to assign or sublet if the Property ceased to be its headquarters.
Mr Justice Marcus Smith concluded that the lease was not discharged by virtue of either the UK's departure from the EU, nor as a result of the EMA being required to move its headquarters from London to Amsterdam.
The requirement for EMA to relocate did not frustrate any "common purpose" of the parties that the lease would provide a European headquarters. In eventuality of the EMA relocating, the lease allowed for assignment or subletting.
The EMA accordingly remains bound by the lease covenants for the remainder of the 25 year term, albeit with the usual ability to assign or underlet.
No doubt this judgment will come as a welcome relief to landlords in the UK's commercial property market. Whilst the facts of this case are relatively unusual, and heavily predicated on the legal need for EMA (as a European Agency) to relocate as a result of Brexit, had the decision gone in favour of the EMA, it could have opened the floodgates to tenants relying on Brexit to try to get out of property contracts.