Landlords can (for now at least) breathe a sigh of relief as the High Court has ruled that a tenant cannot bring its obligations under a lease to an end by invoking the doctrine of frustration simply because it will have no option but to relocate if/when the UK leaves the EU.

In Canary Wharf (B4) T1 Ltd and others v European Medicines Agency [2019] EWHC 335 (Ch), the Court held that even though the European Medicines Agency (“EMA“) would be forced under EU law to relocate outside the UK after Brexit the nature of the bargain between the parties was not made radically different by Brexit and the lease is therefore not frustrated.  On the contrary, the inclusion of carefully negotiated alienation provisions in the lease indicated that the parties had contemplated that the EMA might at some point wish to dispose of its interest.  The EMA will therefore remain fully liable under the lease for the remainder of the term, unless of course it successfully appeals this ruling.

Background

The EMA entered into an Agreement for Lease in 2011 for ten floors in a new building in London’s Canary Wharf.  The building was subsequently constructed to a partially-bespoke specification and the lease was completed in 2014.  The premises were demised to the EMA for a 25 year term with no break rights.

In August 2017, the EMA wrote to Canary Wharf (“CW“) stating that it would treat the UK’s withdrawal from the EU (if/when it occurred) as an event which would frustrate the lease, bringing it to an end.  This was because the EMA would have no option but to relocate to remain headquartered within the EU.  Canary Wharf sought a declaration from the High Court that Brexit and/or the relocation of the EMA would not amount to frustrating events, and that the EMA would accordingly continue to be bound by all its lease obligations.

The EMA argued that the lease would be frustrated for a number of reasons, including that it would lack legal capacity under EU law to occupy the premises or make profitable use of them (eg by exercising the alienation provisions) after Brexit.  It also argued that it would have no power under EU law to continue to pay the rent, and that the premises would no longer be able to be used for the purpose contemplated when the lease was granted.

Decision

Mr Justice Marcus Smith rejected the idea that the lease would be frustrated by Brexit.  Whether a contract is frustrated depends upon whether the supervening event said to cause frustration renders the performance of the bargain “radically different” compared to the parties’ considerations at the time they entered into the contract.

The Judge did not accept that the EMA would lack capacity under EU law to continue complying with its lease after Brexit, but even if its capacity would change, the key was that it had the requisite capacity when it entered into the lease and any subsequent loss of capacity under EU law was not relevant to frustration under English law.  Even if that analysis was wrong, the Judge considered that Brexit would be a self-induced frustrating event as the EU could have made provision for the orderly withdrawal of the EMA from the UK but had failed to do so.  The EMA therefore could not rely on frustration to terminate the lease.

The argument that the premises would no longer be of any use for the contractually contemplated purpose also failed.  The only common purpose was that CW would let the premises to the EMA.  Otherwise, the parties had opposing commercial interests which were reflected in the lease, such as CW resisting the EMA’s attempts to negotiate a break option but being willing to agree a rent inducement package as part of the deal for a longer term certain.  The EMA willingly agreed this deal and committed knowingly to a longer contractual term.  In relation to the nature of the demise, CW only agreed to tailor aspects of the building design and fit out to the EMA’s requirements because the extent and nature of the bespoke parts and the overall package did not prejudice their long term interests.  There was accordingly no common purpose of the premises being let only to the EMA for the whole term.  The supervening event was the EMA needing to leave the premises, and this was envisaged by the inclusion of permissive alienation provisions in the lease.  The exact reason for leaving will be irrelevant, as the lease could be assigned or sub-let in any circumstances provided the alienation conditions are met by the EMA – in other words, it caters for any circumstances in which the EMA might wish to move on.  It does not matter how onerous the alienation requirements might be in practice, as they had been heavily negotiated between the parties and accepted by the EMA.  The bargain between the parties post-Brexit would therefore not be radically different.

Therefore, the EMA remains liable to comply with all the tenant covenants in its lease, including the payment of rent, for the whole term.  If under EU law it becomes incapable of paying the rent and stops paying, it will be liable to CW in damages for breach of the lease.

Comment

This is a knock-down punch against the EMA and good news for landlords.  The decision removes the risk of the EMA invoking a little-used contractual doctrine to dismantle a valuable lease investment.  The Judge’s comments on the inclusion of permissive alienation provisions (which are common) also serve to reduce the risk to commercial landlords of most tenants making a successful frustration argument.

Of course, the Judge has not said that the doctrine of frustration can never apply to leases, nor that Brexit can never be a frustrating event in a contract.  However, given he found that any frustration in this case would be self-induced due to the EU’s inaction, and that in order to succeed on frustration a party must establish that it will be deprived of all or substantially all of the benefit of the contract, it is difficult to envisage a successful frustration argument founded on Brexit for any property contracts.

No doubt the EMA will be considering its options, and given the importance of the principles in this case and the lack of time before the current Brexit D-day, it is possible that any appeal could leapfrog straight to an expedited Supreme Court hearing.  While the property world waits with baited breath to see what happens next, for now it is business as usual both for commercial leases and the doctrine of frustration.

For a more in-depth discussion of the legal reasoning behind the decision, please see the HSF Litigation Notes blog here.

Authors: Matthew Bonye, Partner and Head of Real Estate Dispute Resolution, London; Judith Smyth, Associate, Real Estate Dispute Resolution, London and Rhian Arrenberg, Professional Support Lawyer, Real Estate Dispute Resolution, London

For further information please contact:

Matthew Bonye
Matthew Bonye
Partner and Head of Real Estate Dispute Resolution, London
+44 20 7466 2162
Judith Smyth
Judith Smyth
Associate, Real Estate Dispute Resolution, London
+44 20 7466 2531

Rhian Arrenberg
Rhian Arrenberg
Professional Support Lawyer, Real Estate Dispute Resolution, London
+44 20 7466 2594