The EMA entered a 25-year lease for its London headquarters with the Canary Wharf Group. It is understood that the EMA is required to pay rent of approximately £14m per year and has an outstanding liability for the remainder of the term. Following the UK’s decision to leave the European Union, the EMA announced that it will relocate to Amsterdam and that Brexit will frustrate the lease, which means that the lease would be discharged.
You can read more about what frustration is and what the case means to landlords and tenants in England and Wales here.
What did the Court say?
The Honourable Mr Justice Marcus Smith ruled that the lease will not be frustrated upon exit from the EU. He said:
‘The Lease will not be discharged by frustration on the United Kingdom’s transition from Member State of the European Union to third country nor does the EMA’s shift of headquarters from London to Amsterdam constitute a frustrating event. The EMA remains obliged to perform its obligations under the Lease.’
The Court accepted that the EMA is suffering financial hardship that is unexpected. It also accepted that the removal of the EMA out of London is not a matter it desired and was caused by events outside of its control. However, the EMA chose to enter into a long-term relationship with long-term obligations and played a role in framing those obligations. It could have negotiated a break clause and paid a higher price rather than received the inducements it received.
The Court further stated that the cornerstone tenant like the EMA is critical to Canary Wharf and to its future cash flow. Mr Justice Smith said that
‘[t]hat is why the Lease is so careful to ensure that if the EMA were to leave, CW’s position would not be prejudiced […] Holding the Lease to be frustrated would cause considerable commercial damage to CW, in a manner entirely unexpected and – critically – unexpected because the Lease made provision in terms for the allocation of this risk.’
What does this mean?
The property industry will most likely be relieved. Had the Court decided that Brexit could be a frustrating event and tenants could terminate the lease, it could have caused disruption in the property market with parties trying to use unforeseen events as a way of terminating their lease arrangements.
In practice, this case was decided on its own facts. As said in our previous article, the doctrine of frustration can apply to leases but only in very rare cases. The Courts have historically been very reluctant to apply the doctrine, with the last such case reported in 1903.
In this case, the Court held that that the lease was a bad deal. Depending on the EMA’s lease it could still, however, assign or underlet the property. This may not be what the EMA initially sought, but it may be a viable solution to protect its commercial interests.