Brexit may be frustrating but is it frustration?

Colette Withey| Director | EY Law | +44 (0) 161 333 2830 | colette.withey@uk.ey.com

At the end of January 2019, the European Medicines Agency (EMA) and its landlord, Canary Wharf Group, were before the High Court asking this very question (Canary Wharf (BP4) T1 Limited and others v European Medicines Agency).

The EMA has been based in London since the 1990s. On 26 January, the flags were lowered at the Churchill Place home it leases from Canary Wharf (BP4) T1 Limited and it “symbolically said goodbye” as it moves to Amsterdam, where it must legally be located once the UK leaves the EU on 29 March 2019.

Notwithstanding its departure, the EMA currently remains tied into its London lease until 2039, having agreed (in 2011) to take the lease for a 25-year term without an early termination provision. The yearly rent is a reported £13 million. In the above case, the landlord is opposing the EMA’s contention that the lease should be treated as frustrated when Brexit happens.

The common law doctrine of frustration can technically be relied on where unexpected events, generally not covered by a contract and outside each party’s control, radically change the obligations under that contract from those anticipated when it was entered. In practice it has been applied rarely.

The EMA believes neither party had contemplated that Brexit would happen nor that the result would mean the EMA could no longer operate from London, but both leave it unable to fulfil its lease obligations. Conversely, the landlord’s view is Article 50 existed in 2011, so the right to leave the EU was known to be possible, particularly when considered alongside the political landscape which included the EU Referendum being part of the Conservative Party manifesto. Ultimately, whether it is impossible for the EMA to comply with its obligations is likely to fall on the facts – the requirement for it to be located in the EU will prevent it from occupying and operating in London, but not from paying the rent or complying with standard lease covenants around repair, as unpalatable as that may be in relation to an empty building.

It seems plausible that the EMA may be successful in contending that no reasonable person would have expected the EU Referendum result, but it will be interesting to see whether it is able to persuade the Court that its obligations have fundamentally changed as a result. After all, the EMA retains an ability to assign or sublet and one must question the decision to enter a 25-year lease without any right to break at all. It does indicate a willingness to accept a potential 25-year liability with reliance only on the right to alienate.

The repercussions of a decision in favour of the EMA are widely considered to be most significant for the UK property market – the implication being other businesses would follow suit in trying to extricate themselves from onerous lease agreements they no longer want or need. The consequences could however have a much wider impact on all kinds of commercial contracts where the view so far has been that Brexit related frustration would be very unlikely to assist.

The judgment is due before 29 March 2019 (though it may of course be appealed).