Brexit: A cause for frustration (of leases)?

The property world continues to deal with the impact of Brexit. In a recent twist, the European Medicines Agency (EMA) is facing a battle with its landlord about the future of its occupation of its London HQ.

The EMA has a 25-year lease with no ability to break

In 2014, the EMA signed the lease for its London HQ – a newly built 20-storey tower at Canary Wharf.

Following Brexit, the EMA announced that it would be relocating its HQ to Amsterdam, in March 2019. The EMA’s lease does not include a break option, so the EMA cannot terminate the lease early. With rent at approximately £14million per year and an outstanding liability in the region of £400million for the remainder of the term, this has left the EMA in a difficult (and interesting) position.

Sub-letting or an assignment is an option, but the task may prove challenging as it is widely thought that the lease terms secured by the EMA were something of a “bad deal”.

Can the EMA rely on frustration?

The EMA is hoping instead to rely on the legal doctrine of frustration. In short, a contract can be frustrated (brought to an end releasing both parties from their obligations) if an unforeseen event occurs, which results in the contract becoming impossible or illegal to perform. Case law has established that frustration of a lease is possible, although it has been said to be a case of “not never, but hardly ever”.

In an attempt to pre-empt the EMA's claim, the landlord – The Canary Wharf Group – has asked the court for a declaration that Brexit will not frustrate the lease.

Frustration – Foreseeable?

The first hurdle for the EMA will be establishing that the frustrating event was unforeseeable at the time the parties entered into the contract - not in 2014 when the lease completed, but in 2011 when the parties entered into the agreement for lease. In a preliminary hearing on 26 September 2018, the court ruled that expert evidence would be permitted in order to collate the information that would have been publicly available in 2011. The nature of the expert evidence allowed, and the process used to analyse it, will be very interesting for any other entities considering a Brexit-motivated departure.

Frustration – Unlawful?

The EMA is likely to argue that this unforeseeable event has made performance of its obligations impossible and/or unlawful. In November 2018, the EU passed a Regulation setting Amsterdam as the EMA's HQ. The EMA therefore has grounds to argue that not only is it impossible for EMA (as an EU entity) to site its HQ in a country which is not an EU Member State, but it would be unlawful for it to do so.

The EMA faces an uphill struggle as courts have traditionally been reluctant to allow the concept of frustration in the context of a lease, except in the narrowest of circumstances. The Canary Wharf Group will be keen to establish with certainty whether this type of argument has any hope of success. If the answer is yes, the implications across the wider UK property industry could be catastrophic, although we would expect such a decision to impose a high threshold and limiting circumstances. The judge in the preliminary hearing has ordered that the case must be heard before the 29 March 2019 (for obvious reasons). The property world will be waiting eagerly for the outcome!

Co-authored by Jessica Buttanshaw