Brexit does not frustrate a lease

European organisations cannot argue that Brexit means that they can walk away from their leases.

Landlords of property have welcomed the ruling of Mr Justice Smith that Brexit does not operate to frustrate the terms of a lease. The decision means that the European Medicines Agency (EMA) will remain liable post-Brexit to comply with the terms of its lease in Canary Wharf and the landlord’s interest in the building will not be devalued by the disappearance of the lease.

Background

In 2014, the EMA entered into a 25 year lease of premises in Canary Wharf. Following Brexit, the EMA will need to relocate its headquarters to a new location in the European Union following a change in the regulations governing its status. It is planning to relocate to Amsterdam. The EMA claimed that as a result of Brexit it would not have the legal power to use or to comply with the terms of the lease. It therefore claimed that the lease would be frustrated by Brexit. The landlord, part of the Canary Wharf estate, sought a declaration from the court that the lease would remain in force following Brexit. In a detailed 95 page judgment, Mr Justice Smith ruled that Brexit would not operate to frustrate the terms of the lease.

Legal arguments

The EMA argued that the lease was frustrated by reason of frustration of common purpose and by supervening illegality.

In relation to frustration of common purpose, the argument was that there was a mutual contemplation of both parties that the EMA needed a permanent headquarters for the next 25 years and, that if that could not be achieved, the common purpose of the lease had failed. The judge rejected this approach. In particular, the alienation provisions in the lease permitted assignment and underletting, which was inconsistent with a permanent occupation for the next 25 years. Secondly, the terms of the lease represented not a common purpose but the outcome of rival negotiations driven by different objectives.

In relation to supervening illegality, the judge said that a supervening illegality was not recognised by English law as an event that would frustrate the lease. In any event, having analysed the terms of the withdrawal from the European Union, the judge 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. Even if there was a supervening illegality the judge held that, given the EMA’s status as a body of the European Union, the supervening illegality would have been self-inflicted from the terms the European Union had agreed to govern the powers of the EMA following Brexit.

Conclusion

Legally, it is difficult to argue that a lease has been frustrated. The result is, therefore, not a surprise. Had the judge decided that the lease had been frustrated, the implications would have been profound not only for the landlord in terms of diminution in value of its estate but more widely in terms of the value of property throughout the UK and the uncertainty that such a decision would have introduced.

Given that the EMA remain liable under the term of the lease with a potential rent bill of £500 million, it is possible that the EMA will appeal the judge’s findings. It has until 29 March to lodge an appeal. Given the importance of the issues, it is possible that the appeal might be heard by the Supreme Court.

Canary Wharf (BP4) T1 Ltd and others v European Medicines Agency [2019] EWHC 335 (Ch)

UPDATE: The EMA has settled its case against Canary Wharf as it will be subletting the property to WeWork.