Olivia Foster, in our Commercial Property team, looks at the recent case of Canary Wharf v European Medicines Agency (EMA) and whether Brexit can frustrate a commercial lease.
The High Court has confirmed that a lease of the European Medicines Agency’s (“EMA”) headquarters in Canary Wharf will not be frustrated as a result of the UK’s withdrawal from the European Union (“Brexit”), and the EMA must continue to observe and perform the covenants under its lease for the remainder of the lease term.
The EMA, an agency of the European Union (“EU”), was granted a lease by Canary Wharf (BP4) T1 Limited and Canary Wharf (BP4) T2 Limited (“Landlord”) on 21 October 2014 for a term of 25 years, expiring on 30 June 2039, at a rent of approximately £13 million a year. The significant point to note is that the lease did not contain a break clause, meaning the EMA did not have the option to end its tenancy early.
With the impending implications of Brexit on the horizon, the EU voted to move the EMA headquarters out of the UK to Amsterdam. EMA informed the Landlord by letter on 2 August 2017, stating that “if and when Brexit occurs, we will be treating that event as frustration of the lease”. A contract becomes frustrated if it becomes impossible, illegal or its commercial purpose has been undermined. The EMA argued that as an agency of the EU, it could not remain in the premises on a lawful basis and would need to relocate to the alternative premises in the EU. Further, the EMA argued that if it was to remain bound by the lease covenants to continue to pay rent under the Canary Wharf lease, this would result in a “double rent that would impair the EMA’s capacity, effectiveness and independence.” The Landlord argued that the EMA’s grounds for frustration were not valid as a result of Brexit, and the loss of future rent would be detrimental, and so the case went to the High Court.
On 20 February 2019 Mr Justice Marcus Smith of the High Court held that the EMA’s lease was not frustrated as a result of Brexit and that the EMA remains obliged to perform its covenants under the lease for the remainder of its term. Therefore in the absence of a break clause, the only options the EMA will have are to assign, underlet, or negotiate a surrender of the lease with the Landlord which could be costly.
The High Court’s decision will be warmly received by landlords who will now have certainty that tenants will be unable to bring their leases to an end on a similar basis to that claimed by the EMA.
Is this decision final?
Although the EMA was unsuccessful this time round, on 1 March 2019 the EMA was granted the right to appeal the High Court’s ruling. The EMA lodged a last minute appeal on 18 April 2019, so it is certainly not giving up without a fight. Watch this space for further news.
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This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.