Brexit lease drama?

11 Oct 2018

Many of us suffer from Brexit fatigue these days and those working within the real estate arena tend to focus on how it might affect market sentiment as opposed to it having any legal implications. It is therefore surprising that a “nationally significant case” listed for January 2019 will consider whether Brexit has ‘frustrated’ a commercial lease.

Frustration is a legal doctrine that provides that a particular frustrating event (in this case Brexit) makes further performance of the contract impossible, illegal or significantly different from that agreed between the parties. The event must be something that neither party contemplated when executing the contract. It is considered a difficult doctrine to prove as British courts will not allow a party to resile from a contract if they have simply made a bad bargain.

In this case, the European Medicine Agency (“EMA”) entered into an agreement for lease with Canary Wharf Group (“Canary Wharf”) in 2011 on favourable terms given they were to be an anchor tenant of Canary Wharf’s new 20 storey building. The building was completed (with the EMA involved in design and fit out works) and the lease was duly entered into in 2014 for a 20 year term with no break option.

Following Brexit, the EMA announced that it would be moving from London to Amsterdam (as it has to have its headquarters in an EU member state) and clearly does not want to have to meet its rent and other tenant liabilities at both locations. It has also been suggested that the EU may make performance of the lease by the EMA unlawful as a matter of EU law.

After unsuccessful negotiations and in a pre-emptive and unusual move, Canary Wharf commenced proceedings for a declaration that the lease has not been “frustrated” by the UK’s decision to withdraw from the EU and that all the EMA’s obligations under the lease remain in force until the end of the term. The EMA is arguing that at the time they entered into the agreement for lease in 2011, Brexit was not foreseeable and that it was expressly granted on the basis the UK would remain within the EU. Canary Wharf obviously disagrees and states that Brexit was foreseeable at that time; Article 50 was in the Lisbon treaty and Brexit was in the political discourse of the day.

The presiding judge at the preliminary hearing stage noted that this was a far more complicated case than he had originally envisaged and has required the parties to provide expert analysis and submissions as to what the political landscape looked like in 2011. Whilst this case is likely to affect EU agency tenants in particular, a win for the EMA may see more tenants seeking to argue frustration as a means of escaping liability for both leases and wider contracts.

The EMA can, of course, still assign, underlet or seek to surrender the lease, so one would expect Canary Wharf to be successful on this application, especially as there is no particular reason at present why the EMA cannot use the premises in both London and Amsterdam, albeit they will have additional financial liabilities. The case has been listed to be heard in January 2019 prior to the UK exiting the EU on 29 March 2019 and, provided no settlement is reached beforehand, is one to keep an eye on.

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