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Brexit doesn't mean exit for this tenant

Brexit doesn't mean exit for this tenant

Posted on 5 March 2019

Canary Wharf v European Medicines Agency

In a recent case the High Court rejected the argument by the European Medicines Agency that Brexit had the effect of terminating a lease by the doctrine of "frustration". The judgment will be unsurprising but welcome news for landlords. The opposite outcome would have impacted not just on this particular landlord but on landlords of European businesses who are considering their future in the UK. The High Court judgment has confirmed that Brexit will not interfere with existing landlord tenant relationships and that tenants are not entitled to exit from their lease commitments.

In 2011 the European Medicines Agency ("EMA") took a pre-let of offices in London to become its HQ.  A 25 year lease without a break clause was completed in October 2014.  The landlord, Canary Wharf, paid the EMA capital inducements in excess of £40m.

The EU referendum in June 2016 and the subsequent notification under Article 50 then radically altered the landscape for EMA. In November 2018 the EU decreed that going forward the HQ of the EMA will be in Amsterdam.

Following the Article 50 notification, EMA sought to assign or sublease the property without success.  It then tried to exit the lease in a different way, saying to the landlord that given that it was an EU agency, it needed to be based within the EU and could not operate in a non-member state country. As such after Brexit the purpose of the lease as HQ for EMA would disappear, and the lease would need to come to an end. Unsurprisingly the landlord did not agree and asked the Court to decide the matter.

The question was whether Brexit had the effect of terminating the lease under the doctrine of frustration.  A contract is "frustrated" if an event occurs (a) after it is signed, (b) which renders performance impossible, illegal or radically different from that originally contemplated, (c) is not envisaged by the contract and (d) is not the parties' fault.

The Court ruled that the lease will continue in force, despite Brexit.

The judge said that when the parties originally committed themselves to the lease in 2011, Brexit was only a remote possibility. Nevertheless, the lease clearly contemplated that EMA might not necessarily be in occupation for the whole of the 25 year term. This was why the lease permitted EMA to assign or sublet the lease, subject to conditions.  Therefore it could not be said that the sole purpose of the lease was to be the HQ of EMA only. 

The judge also said that legally EMA could continue to operate in London after Brexit if it wished to do so, although he appreciated why it would not want to.   And to the extent the EMA was legally forced to relocate by the EU's own decision in 2018, this was "self-induced" and could not amount to frustration either.

This is an expected result as it is rare that frustration arguments succeed in terminating leases.  However given the financial consequences involved (20 years left on the lease, current rent £13m pa subject to review) it is no surprise that EMA applied for permission to appeal the judgment. Permission to appeal has just been granted. We will keep you updated.

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