Just how frustrating is Brexit?

17 January, 2019
by: Cripps Pemberton Greenish

A case between the European Medicine Agency (“EMA”) and Canary Wharf Group is being heard in court this week, and it is one to keep an eye on.

EMA has a 25 year lease of its London headquarters in Canary Wharf.  Canary Wharf Group is EMA’s landlord.  The annual rent and other charges due under the lease are approximately £14 million.  The lease does not expire until 2039 and there is no break option.  This leaves EMA with an outstanding liability of approximately £400 million.

Due to Brexit, EMA has announced it will be moving its headquarters from London.  Because it is an agency of the EU, it has claimed that its headquarters must be within an EU Member State and that after Brexit it will not be able to operate from the UK because of EU law.

EMA therefore wishes to end its lease.  Negotiations between it and Canary Wharf Group have been unsuccessful which has led to the landlord commencing proceedings for a declaration that the lease has not been frustrated by Brexit.

What is frustration?

The doctrine of frustration is when something occurs after the formation of the contract which renders it physically or commercially impossible for the contract to be fulfilled, and therefore the contract is discharged and parties are no longer bound to perform their obligations.  In this case, EMA would therefore no longer be liable for rent.

The doctrine was first established by a case in 1863 and successful cases have included events such as the outbreak of war, the cancellation of an event, change in law and subsequent illegality and destruction by fire.  It must be something which renders the performance of the contract impossible, illegal or radically different.  It is not available where the alleged frustrating event should have been foreseen by the parties.  In this case, it will be necessary to look at whether Brexit was foreseeable in 2011 (at the time the agreement for lease was entered into) and expert evidence has been required to help decide this.

Why does it matter?

Although in 1980 the House of Lords agreed that the doctrine of frustration is in principle available to leases, they also noted that this would be “hardly ever”.  This has continued to be the position as there has never been a reported case in England where a lease has been held to be frustrated by any event.  Therefore, if EMA is successful, this has potential to open the floodgates for other tenants to argue their leases have been frustrated too, as it would be clear the doctrine of frustration is definitely available to leases.  Not only that, it could also impact on any contract (not just property) if the courts consider that Brexit as a concept could be an unforeseeable frustrating event.

What next?

Beyond considering whether Brexit was foreseeable or contemplated at the time of the contract (the landlord will argue that it was), Canary Wharf will seek to argue that EMA can still assign or underlet the lease, which is permitted under the lease.  Therefore, it seems unlikely that EMA will be successful in arguing that the contract cannot be performed at all.  However, definitely watch this space.