Frustration for landlords as tenants look to use Brexit as a way of terminating their leases

News - 28/01/2019

Brexit has, if nothing else, generated its fair share of attention grabbing headings. But there is a case going through the courts at the moment which could actually be more than just “Project Fear”.

The case in question is Canary Wharf (BP4) T1 Ltd and others v European Medicines Agency (“EMA”) and the dispute is over their lease of their headquarters at Canary Wharf. EMA moved into the premises in 2014 under a 25 year lease with an annual rent thought to be around £12 million. There is no break right in the lease and the term runs to 2039.

Despite this long term commitment, EMA has recently announced plans to relocate its headquarters to Amsterdam after Brexit. They say that an agency of the EU must have its headquarters in a Member State. Leaving politics to one side, the move raises the question of what EMA should do with their (soon to be empty) expensive premises in Canary Wharf. There is also the small matter of the residual rental liability, estimated to be around £500 Million. To get around this, EMA are running the argument that the lease can be terminated on the grounds of “frustration”.

The law of frustration

Frustration is an ancient legal principle which allows one party to terminate an agreement in circumstances when some unforeseen event occurs that renders the agreement physically or commercially impossible to fulfil.

The unforeseen event must be so fundamental to the agreement that it cannot be performed and it must have been something that was beyond the contemplation of the parties at the time the agreement was entered into. It tends to apply in more extreme circumstances, for example when the outbreak of War makes an exporting contract illegal. The doctrine itself finds its origins in the case of Krell v Henry (1903), where the unforeseen event was the illness of the King Edward VII leading to the cancellation of the coronation procession. For Mr Krell, this meant he could get out of the agreement to rent a room on Pall Mall from where he intended to watch the procession.

Long story short, frustration is rare and difficult to prove.

Canary Wharf v EMA

In the case of Canary Wharf v EMA, the claim for frustration is made out of two key questions. Firstly, was Brexit an unforeseen event when the parties signed the lease back in 2014? Secondly, does Brexit now mean that EMA cannot do operate its business in the way that was intended under the lease?

If the Court finds in favour of EMA, the ramifications for the property sector cannot be overstated. If Brexit means that leases can be frustrated, tenants up and down the Country will no doubt be pouncing on this argument as a way of extricating themselves from onerous or unwanted leases. The floodgates would be open and the disruption for British business could be huge.

However, we are not nearly at that stage quite just yet. EMA face a stiff test in satisfying the Court that their case on frustration has been made out. For one thing, it was back in January 2013 that David Cameron first promised a referendum on leaving the EU. Even the word “Brexit” is said to have been first coined by Peter Wilding back in 2012. So proving that Brexit was unforeseen in 2014 will not be easy. EMA are also likely to have difficulty satisfying the Court that it can only operate from an EU country. Whilst it may make logical sense to operate from a Member State, EMA have to show that operating from the UK is impossible.

For these reasons, many commentators are predicting a resounding loss for EMA. But if we have learnt anything from the Brexit process, commentators are sometimes wrong and anything is possible.

The case of Canary Wharf v EMA is yet to be decided. If you have any concerns about your lease and the impact of Brexit, whether as a landlord or tenant, please do not hesitate to contact Graham Halsall who leads the property litigation team in our Redhill office

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.