“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” Mr Justice Marcus Smith.
The background
With a lease expiring in 2039 with no break option, the European Medicines Agency (EMA) is understandably frustrated by its £13 million per year rental obligation and inability to terminate the lease early. The total liability under the lease to the end of the term is in the region of £500 million. Sub-letting or an assignment is an option, but the task may prove challenging in the current market.
With the Article 50 deadline fast-approaching, the EMA sought 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”.
If successful, the lease would come to an end and the EMA would be discharged from its covenants and obligations in the lease.
The decision
The High Court has confirmed that Brexit will not frustrate the EMA’s lease of its London HQ.
The implications
- Greater certainty as to the impact of Brexit on general commercial contracts.
- The decision is likely to deter others from making similar claims and reinforces the fact that lease obligations are there to be complied with. The decision is likely to prevent companies from using Brexit to avoid other multi-million pound contracts.
- Positive news and more certainty for the Real Estate market.
- If companies decide to relocate, there is a risk that the central London office market becomes flooded with empty buildings. This is perhaps an opportunity for letting agents to broker deals on the sudden influx of vacant office space.
- The EMA has until 29 March 2019 to appeal. Given the sums at stake, the view is that the EMA is likely to appeal the decision.
The lessons
- When taking a new lease, tenants may need to think more laterally and focus on forward planning – even the most unlikely of events should be taken into account.
- Tenants should seek to obtain as much flexibility as possible on alienation and break clauses.
View our previous discussion on this case here.
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