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Can BREXIT frustrate a lease? High Court says No Deal

The High Court has today handed down judgment in the closely watched case of Canary Wharf (BP4) T1 Limited and others v European Medicines Agency.  In what will be viewed as a relief for the property industry, the Court has held that the European Medicines Agency remains bound by the terms of its lease, notwithstanding BREXIT.

What is the case about?

The European Medicines Agency (EMA) leases 30 Churchill Place, Canary Wharf pursuant to a lease entered into in 2014 for a term of 25 years, with no break, expiring in 2039.  The lease was granted pursuant to an agreement for lease entered into in 2011.  The current rent is approximately £13m.

Canary Wharf sought a pre-emptive declaration from the Court that BREXIT does not frustrate the EMA’s lease.  In response, the EMA argued that, as a result of BREXIT, its lease will be frustrated and so, as from 29 March 2019, it will not need to comply with its obligations in the lease.

What is frustration?

Frustration is the legal principle that a contract, including a lease, can be terminated if performance effectively becomes impossible.  A frustrating event must be one which:

• occurs after the contract in question has been entered into;
• is so fundamental as to strike at the root of the contract;
• is entirely beyond what was contemplated by the parties;
• is not due to the fault of either of the parties;
• makes any further performance of the contract impossible or illegal or makes performance radically different from that originally contemplated by the parties.

What has the Court decided

In a complex and detailed judgment, which delves into the constitutional intricacies of EU law, the High Court has found in favour of Canary Wharf and held that the lease was not frustrated. In particular, the Judge held that it would not be impossible as a matter of European or English law for the EMA to continue to hold the lease post-BREXIT and indeed there was no legal requirement for it to leave the UK as an automatic consequence of BREXIT.

Whilst the Judge thought that the possibility of BREXIT could have been foreseeable when the lease was granted in 2011, it was not sufficiently foreseeable that it could have been reasonably expected to impact on the parties’ decision making at the time. That said, ultimately, the EMA had negotiated a 25 year lease and had received an incentive package which reflected the long term certain it was signing up to. Moreover, the lease contemplated the possibility that the EMA might at some point wish to divest itself of the building and included provisions for assignment and sub-letting (albeit on onerous terms). There was nothing to prevent the EMA from seeking to divest itself of the lease through those contractually negotiated provisions and it would be unfair to now provide it with a further means of doing so.

What are the implications of the case?

In reality, and despite the degree of attention it has attracted, the wider implications of the case were always likely to be limited. Ultimately, the arguments turned on the very bespoke characteristics of the EMA as a European institution and the prospect of a wider risk of commercial tenants seeking to argue that BREXIT is a frustrating (in the legal sense!) event has always seemed wide of the mark. However, the Court’s decision reaffirms the very high threshold required to establish frustration and ought to lay to rest any residual concerns on that front.