A recent ruling on the issue of frustration and Brexit could provide relief to commercial landlords.
In the highly anticipated court judgement of Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch), the High Court has rejected the European Medicines Agency (EMA) argument that the UK’s departure from the European Union (EU) would result in its lease for the Canary Wharf headquarters being frustrated.
What is frustration?
Frustration is a rarely used legal doctrine which allows a contract to be discharged if something occurs after the contract has been formed, which renders it physically or commercially impossible to fulfil the contract. It also applies where the obligation has been changed to require a radically different obligation from that undertaken when the contract was entered into.
Facts
In August 2011, the EMA entered into an agreement with the Canary Wharf Group for new headquarters to be constructed and following construction of the premises in October 2014, EMA and Canary Wharf Group entered into a lease for a term of 25 years with no break clause.
In 2016 the UK voted to withdraw from the EU and in March 2017, Article 50 was triggered. As it currently stands, the UK will leave the EU on 29th March 2019 and from that date, will no longer be a Member state. The EMA is an EU agency that has been formed through European treaties which, following Brexit, would have its headquarters in a non-Member state. As such, the EU passed a regulation ordering the EMA to transfer its headquarters from London to Amsterdam to be within a Member state.
On 2nd August 2017, the EMA wrote to Canary Wharf stating that they were intending to treat the UK’s withdrawal as frustration of the lease. Upon receipt of this notification, Canary Wharf applied to the Court for a declaration that Brexit would not frustrate the lease and further, that EMA remained bound by its covenants under the lease for the remainder of its term.
The EMA argued that performance of its obligations under the lease would be ultra vires after Brexit because the withdrawal would “trigger a number of legal changes relating to the EMA’s legal capacity to continue with the Lease”. The second argument put forward was that the lease should be discharged on the grounds of frustration of common purpose.
High Court’s Decision
The Court found that the EMA’s lease will not be frustrated by Brexit, on either argument put forward by EMA.
It was found that:
- There were no constraints on EMA’s ability to perform the covenants of the lease, which would cause it to be frustrated;
- In the event that the EMA was prevented by EU law from using the property or perform its obligations under the lease, “such supervening illegality is not a matter that the English law of frustration takes into account”;
- If the court was mistaken at (1) and (2) above, the legal effects on EMA of Brexit could have been improved by the EU in regulations passed to deal with Brexit. As such, the EU’s failure to do so would be relevant to the question of frustration, as any frustration of the lease was self-induced.
- The Court did not find any common purpose between the parties and found that their interests were divergent. EMA wanted bespoke premises with high flexibility of the term and at the lowest possible rent whereas Canary Wharf were more focussed on a long-term cash flow at the highest rate whilst still allowing EMA to have some input to the design;
- Both parties agreed that EMA could sublet or assign the property if it ceased to be its headquarters;
- The requirement to relocate was not considered to frustrate any ‘common purpose’ of the parties that the lease would provide European headquarters, particularly given the possibility to assign or sublet.
Impact on future cases
This case is likely to provide a level of reassurance and certainty for commercial property landlords as there will be few situations where Brexit will result in a contract being frustrated. However, the judge has extended the normal 21-day window to appeal to 29th March 2019 (the current date of Brexit), which means that EMA can appeal the case. There is also a possibility of any appeal going straight to the Supreme Court given its high profile nature.
If you have any concerns about this case or the doctrine of frustration, please contact a member of our Commercial team.
