The High Court of England and Wales ruled this month that the European Medicines Agency (EMA) is not able to terminate the twenty-five year lease of its Canary Wharf headquarters in London. EMA relocated its headquarters to Amsterdam following Brexit and argued that the Lease, which has a current rent of £13 million per year, was terminated by ‘frustration’ as a result of Brexit.
In this article, we look at the concept of ‘frustration’ and at how it was applied in this case. We also assess whether the concept could be used by other entities seeking to get out of potentially onerous leases or other agreements.
Frustration is a legal doctrine which states that contracts can be set aside where an unforeseen event renders the obligations either physically or commercially impossible, or transforms the obligations so radically that performance is fundamentally different to that initially envisaged.
In this case, EMA claimed that Brexit had changed the basis of the deal it had agreed with its landlord so fundamentally it should be entitled to terminate the lease. EMA argued that once the UK ceased to be a part of the EU, it could no longer deal with real estate in the UK and that both parties to the lease had understood that the Canary Wharf premises would be the EMA headquarters in the EU.
In rejecting both these arguments, Justice Marcus Smith pointed out that EMA was not obliged to relocate its headquarters as a matter of law. He also noted that there were provisions in the lease dealing with assignments and sub-leases and therefore EMA’s departure from the premises had been expressly provided for in the lease.
In what could be seen as a political argument, Justice Smith also made the point that the situation was to some extent self-induced because the effects of Brexit on EMA could have been alleviated by the EU but ultimately were not.
An important point in the case was whether or not Brexit was an ‘unforeseen event’ when the landlord and EMA entered the lease in 2011. The UK has long grappled with its membership of the EU and successive UK governments have had at times tense and fraught relations with Brussels. In that context, it could be argued that was it not entirely unforeseen that the UK would one day rescind its membership.
EMA further argued that the case’s relative justice was in its favour and that, if the lease remained in place, it would suffer more onerously than its landlord would if the lease came to an end. The landlord, Canary Wharf (BP4) T1 Limited, estimated that the cost to it of EMA exiting the lease would be £264million.
The ramifications of the finding go beyond the realms of landlord and tenant relations and commercial real estate. This judgment may also act as a deterrent to those seeking escape or manage their pre-Brexit agreements by using the remedy of frustration.
In the uncertainty surrounding Brexit, this decision lays down a significant precedent for those multinationals who are either already preparing to relocate or are thinking about moving their headquarters from the UK to EU hubs such as Dublin, Amsterdam, Paris or Frankfurt. Furthermore, the case will provide a measure of comfort to UK landlords who have been monitoring the case closely. If, by using the doctrine of frustration EMA was able to break its lease, it would leave open the possibility of the renegotiation of various real estate and other agreements and make it even more difficult to predict and analyse the future effects of Brexit on business.
If you have any queries or require assistance in this area, please contact a member of our Real Estate team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.