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Breaking a lease - EU institution fails to exit lease on Brexit grounds

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The High Court has ruled that Brexit was not a sufficiently frustrating event for breaking a lease at Canary Wharf, London. The lease had been granted to the European Medicines Agency (“EMA”) by the landlord, Canary Wharf (BP4) T1 Ltd & others (“Canary Wharf”).

Although this court decision does not mean that every property lease or commercial contract will be subject to the same analysis and treatment, it is helpful in understanding the potential grounds on which they might be challenged, in appropriate circumstances.

What is ‘frustration’?

The legal principle of frustration of contracts concerns an event occurring that was not the fault of either party to the contract and that, as a consequence, the contract becomes either impossible to perform or is deprived of its commercial purpose.

For example, if there was a contract to sell a painting, which was then destroyed in an accidental fire, it is likely that the contract would be deemed frustrated, as there would no longer be any painting to sell. As the contract would therefore be terminated by way of frustration, neither party would be liable to the other for damages for compensation.

Background to the Canary Wharf case

In 2014, the EMA entered into an underlease of premises with Canary Wharf for a term of 25 years. By 2017, with Brexit very much a consideration in the commercial planning of many companies around the UK, the EMA wrote to Canary Wharf wanting to break the lease stating:

“Having considered the position under English law, we have decided to inform you that if and when Brexit occurs, we will be treating that event as a frustration of the Lease.”

Canary Wharf, foreseeing the uncertainty that the EMA’s position could create, promptly sought a declaration from the Court that:

“. . . the withdrawal of the United Kingdom from the European Union and/or the relocation of the [EMA] (whether inside or outside of the United Kingdom) will not cause [the Lease] to be frustrated and that the [EMA] will continue to be bound by all of its covenants and obligations in the Lease…”

The ‘Frustrating Grounds’

The Court identified the five main grounds on which the EMA claimed frustration (the “Frustrating Grounds”). In brief, these were:

  1. the loss, to the EMA, of the protection conferred on it pursuant to  Protocol 7 to the Treaty on the European Union and the Treaty on the Functioning of the European Union;
  2. the legal inability of the EMA (or any other European Union entity) to use the premises after Brexit;
  3. the legal inability of the EMA to profit from the use of the premises (by way of sub-lease, for instance);
  4. that the performance of the EMA’s obligation under the lease would be ultra vires and unlawful; and
  5. that the EMA would be forced to pay ‘double rent’, as it would need to pay rent; on alternative premises within the EU, as well as the Canary Wharf premises.

The Court’s decision on breaking the lease

The Court considered each of the Frustrating Grounds in turn, but the primary concern was that of self-induced frustration - where one of the parties to a contract has itself brought about the event by which the contract is deemed to be frustrated.

The first two Frustrating Grounds centred around the legal inability of the EMA to continue to be based in the UK after Brexit. That inability stems from Regulation (EU) 2018/1718 of the European Parliament and of the Council of 14 November 2018 (the “Regulation”), which states that:

"The [EMA] shall have its seat in Amsterdam, the Netherlands.

The competent authorities of the Netherlands shall take all necessary measures to ensure that the [EMA] is able to move to its temporary location no later than 1 January 2019 and that it is able to move to its permanent location no later than 16 November 2019”.

The Court considered this point and also noted that the EMA is an agent of the EU. The Court went on to conclude that the EU had within its power, at the time of making the Regulation, the ability to provide sufficient remedy for its agent, the EMA, but failed to do so of its own volition. As a result, if the lease was frustrated, it was as a result of self-induced frustration by EMA as an agent of the EU.

Will all contracts survive Brexit?

Unfortunately, it is still too soon to tell! The Canary Wharf case is important in that it shows Brexit itself will not automatically cause a lease or other contract to be frustrated and consequently, unenforceable. This case is based on facts peculiar to the parties involved – predominately because the EMA is an agent of the EU, and that it was not Brexit itself that caused the frustration, but the resulting Regulation.

Furthermore, due to the value of the contract in question, it is possible that the EMA will appeal this decision and we may see further judicial discussion on the legal principles involved when considering the effect of Brexit.

It could very well be the case that contracts involving a different set of facts could be treated on a very different basis by the Court. It is therefore important for companies to review their existing contracts in the final days before 29 March 2019 and consider whether there may be cause for frustration of those contracts following Brexit. If it appears that there may, companies should promptly seek legal advice as to whether any steps can be taken to remedy the situation and assert their legal position.

If you are concerned about how Brexit might impact any contracts you have, please get in touch with our Commercial Dispute Resolution Team.

 

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