20 February 2019

Landlord wins in Canary Wharf Brexit Frustration Case

The High Court has ruled that a lease will not be frustrated on the withdrawal of the United Kingdom from the European Union.

The High Court's nervously anticipated decision in the case of Canary Wharf (BP4) T1 Limited and Others v. European Medicines Agency [2019] EWHC 335 (Ch) has been handed down today.

The case concerned a 25 year lease granted in 2014 to the European Medicines Agency ("EMA") of part of 25-30 Churchill Place, Canary Wharf, a high quality commercial office building. On 2 August 2017, and following the Government's invocation of Article 50, EMA wrote to its landlord stating that:

"Having considered the position under English law, we have decided to inform you that if and when Brexit occurs, we will be treating that event as a frustration of the Lease."

The Frustration Game

The law of frustration deals with supervening changes of circumstances and sets out when parties to a contract affected by any such changes might consider themselves to be discharged from future performance of their obligations.

The landlord took the view that the commercial uncertainty created by EMA's statement required early resolution, and proceedings were commenced for a declaration that the withdrawal of the UK from the EU would not cause the lease to be frustrated.

It was accepted by the Court that a decision would be required by 29 March 2019, being the date on which the UK is due to leave the EU, and an expedited trial was ordered on this basis.

In the course of a hearing lasting 9 days, EMA (which is an agency of the EU) argued that the withdrawal of the UK from the EU would cause the lease to be frustrated because it would trigger a number of legal changes relating to EMA's legal capacity to continue with the lease.

Getting Political

It is evident that the political and legal constraints within which the EMA operates as an EU body were highly material to the outcome of the case. These points were considered in some detail and it was highlighted that EU Regulations were amended in 2018 to require a change in the location of EMA's headquarters from London to Amsterdam. The Judge also noted that EMA benefitted from similar diplomatic immunity protections to those conferred on international organisations and the embassies of foreign states.

In considering EMA's arguments, the Judge (HHJ Marcus Smith) concluded that in the event of a 'no deal' Brexit, the protections afforded to them would be materially affected. However, he was completely confident that EMA's capacity to deal with property in a non-member state would remain irrespective of the decision to relocate. He also considered the impact of the anticipated withdrawal agreement being ratified, and whilst this didn't change his conclusions, he noted that it would cause EU law to persist in the UK in a way which would ameliorate the adverse effect on EMA's protections.

(Re)location, (Re)location, (Re)location

On this basis the Judge found that, as no constraints on EMA's legal capacity would arise, the lease would not be frustrated on 29 March. He also commented that, even if he was wrong, the EU could have done more than simply ordering the relocation of the EMA to Amsterdam, so any perceived frustration was in any event self-induced.

The Judge highlighted how critical a cornerstone tenant like EMA was to the landlord (both in building the premises and to its future cash flow), and noted that EMA chose to enter into a long-term relationship. They could have negotiated a shorter lease, with a break and paid a higher price as a result, but EMA did none of those things. Instead they accepted provisions which ensure that the rental cash flow is unaffected by a departure from the premises during the 25 year term.

Closing the floodgates?

It remains to be seen whether there will be any other cases, not so reliant upon the tenant being an EU body, where Brexit could lead to frustration of contracts. What is clear for the time being, is that the Canary Wharf decision will not open the floodgates for numerous frustration claims from struggling tenants, as feared by commercial landlords. Instead the decision highlights how limited the applicability of this doctrine is likely to be, although we will now have to wait and see whether EMA decide to appeal.

Emma Gosling is a senior associate in our Property Litigation team.

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