Frustrated by Brexit?

United Kingdom

In Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch) the High Court ruled that The European Medicines Agency (the “EMA”) cannot use the United Kingdom’s upcoming exit from the European Union to frustrate its multi-million pound lease in Canary Wharf (the Lease).

Facts

The Canary Wharf Group (the “Landlord”) and EMA entered into the 25-year Lease of Churchill Place, Canary Wharf (the “Premises”) in October 2014. In August 2017, the EMA wrote to the Landlord and stated that if and when Brexit occurs, it will be treating it as an event of frustration, therefore allowing it to break the Lease and be released from its obligations under it. As a result, the Landlord took the EMA to court, seeking a declaration that after Brexit the EMA would continue to be bound by the Lease.

Frustration arises when an intervening event or change in circumstances is so fundamental in nature that that it renders performance of a contract “radically different” and therefore discharges parties from future performance of their obligations under the agreement. The EMA submitted two arguments that Brexit would frustrate the Lease:

(1) There was a frustration of a common purpose

The EMA claimed that the common purpose between the parties was that the EMA would remain in occupation at the Premises, using it as its permanent headquarters, for the full 25 year term of the Lease; and

(2) There was frustration due to supervening illegality

The EMA pointed out that Regulation (EU) 2018/1718 of the European Parliament and of the Council of 14 November 2018 required it to relocate its headquarters from London to Amsterdam. The EMA claimed that it would be legally unable to use the Premises after Brexit, as an agency of the European Union, and would have no power to meet its obligations under the Lease, including paying rent, after Brexit. It also argued this would prevent it from assigning the Lease or otherwise disposing of it.

Decision

In relation to argument (1), the Judge rejected the proposition that there was a frustration of a common purpose between the parties. The Lease contained assignment provisions and other terms which envisaged the EMA not remaining in occupation for the length of the term. The Judge stated that it was relevant that the EMA chose to enter into this long-term Lease, which expressly provided for the possibility of the EMA departing the Premises. It could have entered into a shorter lease with a break clause and paid a premium for the privilege, but it chose to take the risk of not doing so. When the lease was entered into, Brexit was not foreseeable. However, it was foreseeable that, over the 25-year lease, the EMA might have to leave the Premises and the EMA assumed this risk.

It was also pointed out that the parties in fact had opposite, as opposed to common, purposes and commercial interests in negotiating the Lease as landlord and tenant and therefore did not share a common purpose.

Concerning argument (2), the Judge stressed that the EMA would still have legal capacity to be able to deal with and meet its obligations under the Lease post Brexit. The changes, though adverse, were also not sufficient to render the EMA's performance under the Lease as something radically different enough to frustrate the Lease.

Even if the Judge found that EMA did lack capacity to perform its obligations under the Lease, these constraints would be a matter of EU law. English contract law could not take into account supervening illegality arising under a foreign law when assessing whether an agreement had been frustrated.

The Judge noted however that if the consequences of Brexit for the EMA were that it could legally not use the Premises in any way at all post Brexit, this could in theory act to frustrate the Lease. However, in these circumstances, as the EU had known since 2017 that Britain would be leaving the EU, the EU could have taken further action to improve the legal effects on the EMA. Instead, the EU ordered the relocation of the headquarters of the EMA to Amsterdam. Therefore, any frustration would have been deemed self-induced.

Comment

This decision has therefore not opened the floodgates for frustration claims from tenants seeking to exit their leases in the wake of Brexit, as had been initially feared. It is likely that parties will be held to their contracts even if Brexit makes contracts more expensive or onerous. It has also highlighted how difficult it is to bring a successful claim for frustration under English law and confirmed how narrowly the doctrine is applied by the courts.

However, the EMA was granted permission to appeal this decision in March of this year. The Judge, in granting this permission, noted that the appeal had a real prospect of success and the importance of the case was a compelling reason to grant permission to appeal. Whether this appeal will be successful remains to be seen.