161: Brexit cannot frustrate a commercial lease – High Court ruling
Jennifer Chappell Real Estate Counsel
A landlord has won its High Court case against the European Medicines Agency’s confirming that its 25-year lease of premises in Canary Wharf will not be frustrated after BREXIT. Losing this case would have seen the landlord, Canary Wharf Group, miss out on up to £500 million in rent as well as opening potential floodgates to other similar cases.
As mentioned in our previous blog, the EMA sought to terminate its 25 year lease of commercial premises as it now needs to relocate its headquarters to Amsterdam after BREXIT. It argued that when the parties negotiated the Canary Wharf lease back in 2011, neither party expected the UK to withdraw from the EU. Canary Wharf Group sought a declaration prior to BREXIT that the EMA would be obliged to continue to pay rent and comply with all its covenants in the commercial lease.
The EMA’s main argument was that the UK’s departure from the EU would ‘frustrate’ its lease. It maintained that it would no longer be lawful for it to pay the rent after the UK leaves the EU because it would be ultra vires to have its HQ in a non-EU country. A contract may be discharged on the ground of frustration when something occurs after the formation of the contract that has rendered it physically or commercially impossible to be fulfilled.
Mr Justice Marcus Smith has now rejected this argument on the ground that the EMA would still have capacity to deal with property in a non-EU country and have capacity to continue performing its obligations under the commercial lease. The court did acknowledge that the EMA was obliged by a 2018 EU regulation to move its headquarters to Amsterdam, and that there were strong political reasons for the EMA not to remain in the UK after Brexit. However, this was not enough to frustrate the contract.
The EMA’s other argument was that the lease should be discharged due to frustration of a common purpose. The court rejected this because there was no common purpose outside the lease. The parties had different purposes. The landlord’s purpose was long-term cash flow at the highest rent and a preparedness to allow the EMA to have a say in the building’s original fit-out provided that this was not adverse to the landlord’s interests. The EMA’s purpose was for bespoke HQ premises in Canary Wharf, flexibility on the term and paying the lowest possible rent.
Given the large amount of rent involved, it looks likely that the EMA will appeal against this judgment before the end of March 2019 and will go directly to the Supreme Court.
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