February 26, 2019

Brexit: A source of frustration?

The High Court has just handed down its eagerly anticipated decision in Canary Wharf (BP4) T1 Limited and others v European Medicines Agency [2019] EWHC 335 (Ch) confirming that Brexit will not frustrate EMA’s lease. It is the first major property dispute with Brexit at its heart.

Background and Facts

In 2011, the European Medicines Agency (the EMA) entered into an agreement for lease for a 25 year term in respect of Churchill Place – a newly-constructed 10 floor building in Canary Wharf.  The lease was entered into in 2014, however it crucially did not contain a break right allowing for early termination.

Following the result of the 2017 referendum on the United Kingdom’s (the UK’s) membership of the European Union (the EU), the EMA decided to relocate to Amsterdam.  In June 2018, the EMA’s landlord, Canary Wharf Group (CWG), issued a claim in the High Court for a declaration that Brexit (currently scheduled for 29 March 2019) and the relocation of the EMA will not frustrate the Lease – so that the EMA remains liable to meet all of its financial obligations under the lease for the duration of the term.

Legal Principle of Frustration

The Courts can order that a contract (in this case a lease) is frustrated when an unforeseeable event (at the time of entering into the contract) happens after completion which makes it impossible (a) to fulfil the contract or (b) for the party to perform its obligations, as they have been radically changed. The principle is extremely difficult to argue in the courts and rare in its application.

Claim

CWG’s Claim

CWG brought the case in an attempt to pre-empt the EMA’s claim for frustration.  They claimed that Brexit was reasonably foreseeable as:

  1. The legal and political process for leaving the EU is enshrined in EU law under Article 50 and has therefore always been a possibility; and
  2. The Conservative Party manifesto for the 2010 general election (1 year before the parties entered into the agreement for lease) contained a pledge to hold a referendum on the UK’s membership of the EU.

The EMA’s Claim

The EMA argued that Brexit will amount to an event of frustration in relation to the lease.  As an agency of the EU, the EMA’s headquarters must be within an EU Member State.  The EMA therefore claimed that because of Brexit, the lease was frustrated as it would become illegal for it to be bound by its lease obligations.  The EMA also argued that the common purpose agreed at the time of entering into the lease with CWG was now rendered radically different by Brexit.

Judgment

In a detailed ruling, the High Court concluded that Brexit is not a frustrating event and the lease will continue even if the UK leaves the EU without a deal.  Mr Justice Marcus Smith also dismissed an argument that, if the lease was not frustrated, there was a self-standing rule of EU law that would absolve the EMA of its obligations as tenant.

Frustration of Common Purpose

To establish whether there was a common purpose between the EMA and CWG at the time of entering into the lease, the Court analysed the terms of the lease and the facts surrounding entry into the transaction.  The EMA argued that there was a mutual contemplation of both parties that the EMA needed permanent headquarters for the next 25 years and Brexit ensured that this common purpose had failed.

Mr Justice Marcus Smith rejected this approach.  In particular, the alienation provisions in the lease permitted assignment and underletting was inconsistent with permanent occupation for the next 25 years.  Furthermore, the lack of a break clause in the lease demonstrated that the EMA were prepared to assume the risk of change over the 25 year term.  All of these points considered, the Court held that the case did not even come close to frustration of a common purpose.  It was also held that there was no common purpose between the parties outside the terms of the lease. 

Regarding foreseeability, the Court held that Brexit was not reasonably foreseeable in 2011 when the agreement for lease was entered into.   It was however foreseeable that the EMA may want to relocate their headquarters at some stage during the term of the lease (which was dealt with by the detailed alienation provisions in the lease referred to above).

Frustration of Supervening Illegality

In relation to supervening illegality, Mr Justice Marcus Smith held that a supervening illegality was not recognised by English law as an event that would frustrate the lease.  In any event, the court assessed a number of Brexit scenarios, and found that even a stark no-deal Brexit was not sufficient for the lease to be frustrated.  Having analysed the terms of the UK’s withdrawal from the EU, the Court concluded that the EMA would continue to have the power to observe the terms of the lease even if it could not occupy and use the premises.

What Next?

All consequential matters, including any question of permission to appeal, have been adjourned off to be dealt with in a separate Hearing.  Due to the sums at stake, it is quite likely that the EMA will seek an expedited appeal to the Court of Appeal and possibly a leapfrog to the Supreme Court.  However, the fact that (i) this decision follows a long line of cases where tenants have unsuccessfully argued that their leases are frustrated and (ii) the High Court has given such a thorough judgment, suggests that the prospects of a successful appeal are fairly remote.

Comment

The judgment means that property companies and landlords will be breathing a huge sigh of relief.  The ruling demonstrates that Brexit cannot serve as a get out clause for leases and other contracts.  The decision is also likely to rule out similar arguments being utilised to allege frustration of contracts beyond the property markets.

More generally, unless Brexit is avoided it is likely we can expect a marked increase in certain types of property disputes in 2019, notably:

  1. More break options being exercised by tenants;
  2. More cases where landlords challenge the validity of breaks; and
  3. More attempts by parties to renege on contractual obligations which are no longer attractive in light of Brexit.

If you have any questions or would like to discuss this topic further, please don't hesitate to contact Keith Conway, Oliver Levy or your usual Clyde & Co contact.