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20 February 2019

EMA Canary Wharf Case Judgment

Comment from James Souter, Partner on the EMA Canary Wharf Case Judgment

You could almost hear the property market’s collective sigh of relief at today’s Judgment.

The uncertainty posed by Brexit is already causing concern to businesses across the country. If the Court had found that Brexit could be used to enable tenants to walk away from their leases, it could have led to chaos in the property market. Yet in this case, given the high stakes, the Judge took an extremely practical approach, and found that the EMA could legally continue to operate out of London, in spite of Brexit.

The background to the Judgment is also enlightening. The EMA had not established any further legal protections against such ‘seismic changes’. In truth, its lease was something of a bad bargain. Without any flexibility – such as a standard lease break – the EMA found itself backed into a corner, unable to protect its commercial interests.

Perhaps Brexit won’t be so frustrating after all?

Today saw the much-awaited Judgment of the Honourable Mr Justice Marcus Smith handed down in the High Court in Canary Wharf Group v European Medicines Association.

The Canary Wharf Group (CWG) had sought a declaration that Brexit would not extinguish the lease of a building in the heart of London’s Canary Wharf by virtue of the little used legal doctrine of frustration. The tenant on the other hand sought a declaration that it would. If the tenant was successful they could have walked away from the significant financial obligations in the lease and set a concerning precedent for landlords.

Facts

The tenant, European Medicines Agency (EMA), is a decentralised agency of the European Union responsible for approving drugs for the European Union. As such, it is heavily regulated by the European Union and it enjoys the privileges and immunities granted by Protocol 7 to the Treaty on the European Union.

In June 2014, EMA entered into a 25-year lease of its London headquarters with CWG. The annual rent is around £13m with 5-yearly rent reviews. The lease had no break clause for the tenant but did contain rights to assign and underlet. 

Following the UK’s decision to invoke Article 50, EMA made plans to relocate its headquarters from London to Amsterdam.  As a result it has been left with significant obligations under a lease it no longer needs.  Importantly, whilst the move was prompted by the impending threat of Brexit, it has already happened by virtue of an EU Regulation.

The EMA argued that Brexit was an unforeseeable event which has frustrated and therefore automatically terminated the lease. 

Doctrine of Frustration

Generally speaking a contract is terminated by virtue of frustration if an event occurs after it was formed which is so fundamental as to be regarded by the law as both striking at the root of the contract and being entirely beyond what was contemplated by the parties when they entered the contract.  Importantly that event will not be the fault of either party but its happening will render further performance of the contract impossible, illegal or make it radically different from that contemplated by the parties at the time of the contract.

After much debate in case-law it has been confirmed that the doctrine of frustration can apply to leases.  However, it is considered that the circumstances in which it will be applied are very rare and there is little guidance in terms of when it could be applied.

Decision

The unusual facts of this case meant it was a rare case in which some thought the doctrine of frustration might be applied to a lease.  However, the Judge decided that on the facts before him the lease was not frustrated.  

The ninety-five page Judgment covered a lot of ground including the various possibilities for the UK’s withdrawal from the European Union.  In short, the Judge found that, however unlikely it might be, the EMA could as a matter of law continue to maintain its headquarters in London post-Brexit.  He went on to find that the move of its headquarters from London to Amsterdam resulted not from Brexit but a decision of the European Union by way of a 2018 Regulation. 

Whilst he described the UK’s withdrawal from the European Union as a ‘seismic event’, and found that it was theoretically foreseeable in August 2011 when the Agreement for Lease was entered into, the Judgment said it was not in the contemplation of either party at that time.  The Judge went on to find that hindsight had shown the EMA to have paid too high a price for the premises and not built in sufficient flexibility to protect its commercial interests.  They had sought a break clause in the negotiations but conceded that as part of the commercial negotiations.

The property world will breathe a huge sigh of relief as a result of the Judgment.  The uncertainty posed by Brexit is already causing concern to businesses across the country.  If it had been found that Brexit would allow tenants to walk away from their leases, it could have caused chaos in the property market.

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