Brexit held not to have frustrated lease

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10 April, 2019

Canary Wharf (BP4) T1 Ltd and others v European Medicines Agency [2019] EWHC 335 (Ch)

The court's finding, on 20th February 2019, in favour of the landlord, Canary Wharf Group, will be met with a sense of relief by those in the Property industry. The tenant, European Medicines Agency (EMA), was hoping to escape an overall rent bill of around £500 million it is contracted to pay to Canary Wharf Group, as the European agency shifts to Amsterdam due to Brexit. However, the High Court ruled that the EMA was not able to treat their lease as 'frustrated' and therefore remains bound by the full 25-year term.

The challenge for anyone entering a lease is in allowing for flexibility for changes in circumstances and to carefully define when the right to renegotiate or terminate will arise. Under the terms of EMA's lease neither party had the right to end the lease before the contractual term expires in 2039, however the EMA argued that it should be able to break the lease on the basis that it has been "frustrated" by Brexit. A contract may be frustrated when something occurs after the contract has formed which is so fundamental that it strikes at the root of the contract and is entirely beyond what was contemplated by the parties when they entered the contract. The event is not due to the fault of either party but renders further performance of the contract impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract. The fact that the contract is just more inconvenient or costly will not be sufficient for a contract to be frustrated. The legal doctrine of frustration in contract law is rarely successful and had never been successfully argued before the English Courts in relation to a lease. Unfortunately for EMA, their case is yet another which highlights just how narrowly the courts construe the doctrine and how difficult the argument is to successfully pursue.

Central to EMA's claim was that their contract with Canary Wharf Group was frustrated because the decision for the UK to leave the EU was an unforeseen event, made their contract impossible to fulfil and it radically changed their original reason for signing. The judge, Mr Justice Smith, said that it was not yet clear what form the UK's departure from the EU would take. However, he could not 'wait and see' so determined whether a frustrating event occurred on the basis of a 'no deal' scenario.

George Iacobescu, chairman and CEO of Canary Wharf Group, told the court that the possibility of leaving the EU "was known to everyone" therefore Brexit was not an event of frustration because it was foreseeable at the time of entry into the lease in 2011 as there was topical debate on the desirability of remaining in the EU. If the EMA wanted to be released from the lease in such circumstances, they could have negotiated a break clause exercisable in the event of Brexit. By contrast, EMA asserted that the lease included provisions for "earthquakes, explosions and terrorism" but nothing for Brexit. Therefore, the absence of any discussion about Brexit reveals that, unlike the possibility of an earthquake in London, it had never occurred that the UK might leave the EU.

Despite concluding that Brexit was not "relevantly foreseeable" when the parties agreed the lease, the judge found that the EMA had "assumed the risk of change" over the lease term. The Judge did not mean that Brexit was anticipated or in the contemplation of the parties, rather it was foreseeable that over the 25 years, there may be some development that would require the EMA to have to leave the premises due to circumstances beyond its control. The EMA had "quite consciously entered into the lease without a break clause" and negotiated provisions defining the circumstances in which it could depart. The Judge held that the EMA could have opted for different premises with a shorter lease or negotiated a break, but they did not. There was some recourse for EMA in the end, however, as the Judge confirmed they could sublet or assign the premises, subject to the landlord's consent.

The case is one of the first to explore Brexit's implications for businesses, however as Brexit uncertainty continues, more businesses are expected to attempt to minimise potential risks posed by Brexit. Nevertheless, the reality is that the argument of frustration is rarely applied as the threshold is very high. The Judge reiterated that "a contract is a legally binding agreement and Brexit cannot override that. The result is reassuring for landlords who might have been concerned that the floodgates would open for tenants to try to terminate leases because of Brexit. The case acts as a reminder to review contracts to ensure they are carefully drafted to account for unforeseen events.

For more information contact Alice McKenna in our Commercial Property department via email or phone on 01254 222405. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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