Relief for landlords as Brexit fails to frustrate a lease

Summary

By its much anticipated and comprehensive judgment just issued in Canary Wharf (BP4) T1 Limited and others v European Medicines Agency [2019] EWHC 335 (Ch), the High Court has rejected a tenant’s argument that its lease of a substantial office building in Canary Wharf will be terminated by frustration if the UK leaves the EU on or after March 29, 2019. 

The facts

The claimant, Canary Wharf, is the owner of a substantial office building in Canary Wharf, E14  known as 25-30 Churchill Place. The defendant, a decentralised agency of the European Union known as the European Medicines Agency (“EMA”), is its tenant of floors 1 -10  under a lease granted in 2014 (pursuant to an agreement for lease entered into in 2011) for a term of 25 years, reportedly commanding an annual rent of approximately £14m. EMA occupies the premises as its headquarters and it asserted that it is legally obliged by EU law to be located in an EU member state. 

The proceedings 

Canary Wharf issued proceedings in June 2018, seeking a declaration that Brexit would not frustrate the lease and that it will continue in full force and effect even if the UK leaves the EU. EMA counterclaimed seeking a declaration that the UK’s exit from the EU will amount to an event of frustration of the lease and/or that it will render EMA’s future performance of the lease ultra vires and so, unenforceable as a matter of EU law. 

The judgment 

The highly anticipated judgment of the Honourable Mr Justice Marcus Smith comprehensively dismissed the EMA’s case. He rejected the argument that EMA’s continuing performance of its obligations under the lease would be rendered illegal following Brexit and in any event, determined that even if that was right, EMA’s position was self-induced because the EU could have taken steps to ameliorate the position. He also rejected EMA’s argument that Brexit would frustrate the parties’ original common purpose because, although Brexit itself was not foreseeable in 2011, the parties contemplated the possibility that EMA might have to vacate the premises involuntarily at some point over the long 25-year term and therefore included provisions entitling EMA to assign or sublet its lease.

Whilst it is possible that EMA may seek leave to appeal the decision and indeed might ultimately seek to refer the matter to the ECJ on issues of EU law, the judgment is detailed and carefully considered and accords with most observers’ anticipated outcome.

Conclusion

Whilst the judgment is good news for the UK commercial property industry, it turned principally on a detailed consideration of the particular political and legal constraints on the EMA as an EU agency and is not therefore of wide application. However, the judgment includes detailed consideration of English law as it applies to frustration of leases and reiterates how difficult it is for frustration to arise. Accordingly a tenant who wishes to take a lease of premises for a particular purpose or for a specific appointment or future event only, should seek to include in the lease an express break clause entitling it to terminate the lease should unforeseen circumstances arise, rather than rely on the common law of frustration.