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31 January 2019

159: Can Brexit frustrate a lease?

A High Court trial has taken place this month (January 2019) between Canary Wharf Group and the European Medicines Agency (EMA) over the impact of Brexit on the EMA’s 25 year lease of a commercial property based in Churchill Place, Canary Wharf.

As a result of Brexit, the EMA is moving from London to Amsterdam and Paris, and it wishes to end its lease. The EMA has been taken to court by its UK landlord, Canary Wharf Group, who wants the EMA to continue to pay the remaining rent and continue to be bound by the lease covenants. The rent is estimated at around hundreds of millions over the remaining term of the lease which expires in 2039 and contains no break clause.

Canary Wharf Group is seeking a declaration that the UK’s withdrawal from the EU and / or the relocation of the defendant tenant will not cause the lease to be discharged on the grounds of frustration. Frustration means that the lease would potentially be brought to an end as something has rendered it physically or commercially impossible to be fulfilled.

The EMA argues that when the parties negotiated the lease back in 2011 neither party expected the UK to withdraw from the EU. The landlord is arguing that Brexit was not unforeseeable due to the existence of Article 50 of the Treaty of the European Union, and that the ‘European Medicines Agency’ would have been fully aware of this at the time of negotiation of the 25 year lease. It also argues that the 10 floor anchor tenant premises in Canary Wharf was actually purpose built for the EMA, who knew what they were doing and did not request a break clause in the lease.

If the order is made in EMA’s favour, other tenants may potentially look to use Brexit or similar unforeseeable events as the reason to terminate a lease in the absence of a break clause. In the past it was considered that a lease of land could not be frustrated as it created an estate in land which was indestructible. However, it is now accepted that the doctrine of frustration is capable of applying to a lease if a frustrating event occurs during the currency of the term, although it has rarely been used.

Whilst it seems to be unlikely that the Court will allow a lease to end due to Brexit, it is arguable that frustration of the contract through Brexit has altered the basis of the foundation of the contract taken on by the EMA. This is very specific to its own facts and is expected to set a precedent purely for European agencies as tenants of offices.

The judgement is awaited with interest by the property industry and even the judges have stated that this is a ‘harder case’ than originally thought.

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