26 July 2019
Author: James Nelson, Solicitor
Earlier this year, the High Court heard the case between a UK company (Canary Wharf (BP4) T1 Limited) and a European Union regulatory body (the European Medicines Agency, or EMA). The case was widely publicised at a sensitive time for both the UK and the European Union in connection with the crunch talks that were ongoing between the two parties vis-à-vis Brexit and withdrawal arrangements. The outcome of this case had the potential to re-shape domestic law, lead to adverse repercussions for commercial landlords and impact the political dealings between the UK and the EU.
The dispute between the parties concerned a 25-year lease at 30 Churchill Place, Canary Wharf between Canary Wharf Group (the landlord) and the EMA (the tenant), which commenced in 2011. The EMA had negotiated the lease on the basis of retaining the property as its flagship headquarters. As such, no break clauses were negotiated or provided for within the lease and the property was fitted out specifically for use by the EMA.
The United Kingdom voted to leave the European Union in 2016 and upon the triggering of Article 50 of the Lisbon Treaty the EMA reacted by announcing its intention to relocate its headquarters to Amsterdam. EMA then had to decide what to do with their UK headquarters in Canary Wharf, as the rent and related charges under the lease amounted to a figure of approximately 16 million euros per year. EMA had the ability under the lease to assign or sublet the property, or they could have explored some form of negotiated surrender with Canary Wharf Group. EMA opted however to argue that the doctrine of frustration applied to release them from their liabilities under the lease and bring it to an end.
EMA contended that Brexit was an unforeseen event and it had ‘frustrated’ their lease with Canary Wharf Group - as a consequence (as per the principle in Krell v Henry 1) making the lease impossible to perform. Canary Wharf Group however applied to the court for a declaration to the contrary – that Brexit was not an unforeseeable event and the lease between the parties must therefore continue to subsist.
EMA’s line of argument was twofold: namely that (1) the triggering of Article 50 was an unforeseen event when the lease was entered into in 2011 and (2) the EMA, as an agency of the European Union, have a policy of ensuring their headquarters are located in EU member states (and thus could no longer be located in what would be ‘non-EU’ London).
Conversely, Canary Wharf Group argued that (1) Brexit was a foreseeable event in 2011 given the fact that Article 50 was in existence in 2011 (and therefore the possibility of a UK exit from the EU was always a possibility) and (2) they would suffer financial loss if the lease was frustrated, as they were reliant upon rental income from EMA to pay back lenders (who, in turn, had subsidised the original construction of the building).
On 20 February 2019, the High Court ruled in favour of Canary Wharf Group. The court determined that the UK departure from the European Union could not frustrate the contractual provisions of a commercial lease and thus allow a tenant to walk away from their obligations. Mr Justice Smith addressed the legal arguments put forward by EMA in conjunction with the doctrine of frustration, namely that of ‘supervening illegality’ and ‘common purpose’.
Concluding his judgement, Mr Justice Smith ordered that the EMA remained ‘obliged to perform its obligations under the Lease 2. He further commented that English law had evolved a doctrine (frustration) and the EMA had ‘subscribed’ to a lease governed by English law.
Having considered the merits of appealing the decision, the EMA did lodge an appeal in April 2019 although discussions between the parties were ongoing in the background. On 4 July 2019 the parties reached agreement for the EMA to sublet the entirety of their premises to the serviced office company WeWork. Alongside this, the EMA simultaneously withdrew its appeal – thus bringing the dispute to a close.
In legal terms, this decision confirmed that the established principle of frustration only applies to commercial leases in the scarcest of situations. It also confirmed (for the time being) that key political decisions (such as Brexit) are not capable of frustrating commercial leases.
The court, having determined in favour of Canary Wharf Group, averted the potential flood of litigation spearheaded by tenants with sizeable operations/connections within the EU (who may have readily followed EMA’s argument that Brexit had frustrated their leases). This came as a welcome relief to commercial landlords and provided the property industry with some degree of assurance that the market would sustain some stability against the backdrop of increasing uncertainty regarding Brexit negotiations.
Future occupiers and landowners alike will pay heed to the fact that EMA did not negotiate a break clause. Whilst the foreseeability of Brexit was self-evidently not at the forefront of EMA’s negotiating strategy, the inclusion of a well-timed break provision would have given them an earlier option to determine the lease. Moreover, EMA had clearly decided to commit to a lease of 25 years with no breaks and the corresponding financial cost and risk of this commitment.
Interestingly, although the court ruled that the UK departure from the EU was not foreseeable in 2011 – it did not rule out the fact that real estate transactions post-2016 (i.e. post referendum) could be considered as a frustrating event. As such therefore whilst it appears from the judgement handed down in this case that the door to this particular argument has been locked for the time being, the key has not necessarily been thrown away. Whether a successful claim for a commercial tenant is possible in this scenario remains to be seen, although it is clear that the court placed considerable weight on the factual circumstances surrounding the case.
In any event, the case provides a valuable lesson for prospective commercial landlords and tenants alike of the importance of negotiating suitable terms within a commercial lease and the costly ramifications of not doing so, particularly in relation to exit arrangements in the form of break options, flexibility around alienation provisions or other appropriate exit arrangements.
2. Canary Wharf v EMA Approved Judgment (https://www.judiciary.uk/wp-content/uploads/2019/02/2019-02-20_Canary-Wharf-v-EMA_Approved-Judgment.pdf)
This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.
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