Frustrated by Brexit! The EMA’s case against Canary Wharf Group

In the ‘nationally significant’ case of Canary Wharf (BP4) T1 Limited and others v European Medicines Agency, a tenant is attempting to use Brexit as a means of breaking its commercial lease.

Following its public decision to relocate its headquarters to Amsterdam after the UK’s decision to leave the EU, the European Medicines Agency (EMA), an EU agency responsible for supervising medicines used by humans and animals, is set to defend legal proceedings in the High Court brought by the landlord of its headquarters in London, Canary Wharf Group Plc (CWG). 

In 2014 the EMA entered into a 25-year lease with CWG for 10 floors of a Canary Wharf office building, for a reported rent of around £12 million per annum.

The parties’ agreement to enter into the lease assisted CWG in raising £384 million to redevelop the London Docklands business district. CWG, who are reliant on the rental income from the development to repay their creditors, filed their claim at the High Court in July 2018 in anticipation of the EMA’s claim and in an attempt to provide certainty for their shareholders and lenders, as the residual liability of the lease is reportedly worth around £500 million.

Under the terms of the lease neither party has a right to end the lease before the contractual term expires in 2039, however the EMA now argues that it should be able to break this lease on the basis that it has been “frustrated” by Brexit.

What is the legal doctrine of “frustration”? 

Where an event occurs which the parties could not have foreseen when contemplating the contract and which so radically alters the parties’ performance of the contract such that it would be so unjust for the parties to continue, the contract should be terminated. 

The EMA argues that Brexit fulfils these criteria because:

• The EMA is required by EU law to be based in an EU member state in order to obtain various privileges afforded to decentralised EU agencies, meaning it will be ‘legally obliged’ to relocate to European premises; and
• Brexit was not an event which could have been foreseen by either party when deciding to enter into the lease; as opposed to “an earthquake in east London”, which they argue the parties would be expected to foresee when contemplating the lease.

Frustration rarely steps into the legal spotlight and, rarer still, does it prove successful in releasing a tenant from their obligations.  Even in London and Northern Estates Company v Schlesinger [1916] 1 KB 20, where an Austrian was prevented from accessing his leased premises due to a Wartime Order, the court found the contract was not frustrated.

The wider implications of this case could be significant and detrimental for the UK commercial property market should the Court rule that Brexit does qualify as a frustrating event.  A finding in favour of the EMA could open the floodgates to claims by many other commercial tenants seeking to frustrate their leases on similar grounds.

Update:

In a judgment released on Wednesday 20 February 2019, Mr. Justice Smith in the High Court concluded that EMA’s lease is not frustrated by Brexit.  This decision came as a welcome reassurance to commercial landlords of property leased to European tenants, as it reinforced the high threshold required to prove frustration.

On 1 March 2019, the EMA were granted the right to appeal the High Court’s ruling.  The EMA duly lodged their appeal on 18 April 2019. 

In July 2019, however, the EMA applied to withdraw their appeal.  This decision comes after the EMA confirmed that it had sublet its leasehold property to WeWork; a company providing flexible workspaces.  WeWork’s sublease will run until the expiry of the EMA’s lease.  The EMA, meanwhile, have relocated their operations to Amsterdam.  The end to this dispute means that, for now, the High Court’s judgment remains good law, undoubtedly to the relief of many commercial landlords.