The High Court has ruled that the United Kingdom’s withdrawal from the European Union (EU) will not frustrate a lease.
The European Medicines Agency (EMA) entered into an agreement for lease in 2011 for its headquarters in Canary Wharf, London, with the lease itself being completed in 2014. The EMA were involved in the design and extensive fit-out works at the premises. The lease was for a term of 25 years, without the availability of a break clause.
The EMA’s existence and functionality is governed by several EU regulations, one of which specified that its headquarters was to be situated in London. Following the UK’s decision to leave the EU, this was changed to Amsterdam and the EMA announced the relocation of its headquarters and informed their landlord that when Brexit occurs they would treat that as an event capable of frustrating the lease.
The landlord referred the matter to the High Court for an urgent determination, seeking a decision before 29 March 2019.
Generally, if an unforeseen event occurs so as to render the performance of a party’s obligations commercially or physically impossible, illegal or drastically different, both parties can be released from their obligations as the contract is treated as ‘frustrated’. The unforeseen event must be fundamental to the terms of the contract. The fact that the contract will be more expensive or inconvenient as a result will not usually suffice.
The EMA’s grounds for frustration
The EMA’s main argument was that after the withdrawal of the UK from the EU, it would not have the capacity to be lawfully located in the premises. The EMA contended that the payment of rent after Brexit would amount to a supervening illegality. This was rejected by the court on the basis that, after Brexit, the EMA would still have the capacity to deal with immovable property in a country not within the EU, be it by transferring or assigning the lease with consent. Therefore, the EMA was held to be capable of performing its obligations lawfully after Brexit.
The EMA’s alternative argument was that the lease should be ended due to frustration of a common purpose. However, the court ruled that there was no common purpose at the moment of entry into the lease and that in fact, the parties had divergent purposes. The landlord’s purpose was a long-term rental income at the highest rate whilst the EMA’s purpose was to have bespoke premises at the lowest rent. On this basis, the EMA’s alternative argument was also rejected.
Marcus Smith J, concluded by stating that “the lease will not be frustrated on the withdrawal of the United Kingdom from the EU. This is neither a case of frustration by supervening illegality nor one of frustration of common purpose. The lease will not be discharged by frustration on the United Kingdom’s transition from Member State of the European Union to third country nor does the EMA’s shift of headquarters from London to Amsterdam constitute a frustrating event. The EMA remains obliged to perform its obligations under the lease.”
At a time of general uncertainty surrounding the implications of Brexit, this decision offers some welcome clarity, for landlords at least, regarding the security of their rental incomes and continuing liability of their tenants post-Brexit and is likely to deter other tenants from making similar claims. Having said that, given the sums involved in this case, the prospect of an appeal by the EMA to a higher court, perhaps the European Court of Justice, may be likely.
Please note that this information is provided for general knowledge only and therefore specific advice should be sought for individual cases.
For further information, please contact Kenny Friday