Commercial Property, Frustration and Brexit

05/03/2019

The UK’s return of a vote in favour of leave in the referendum on its future relationship with the European Union had an impact on the latter’s decision as to where its European Medicines Agency should be based and, having entered into a lease for a property based in the United Kingdom some 21 months prior to the result, wished for it to be relocated.
Could such an event be sufficient enough to argue that a tenant, in these circumstances, should no longer be held to its lease contract, and how can a tenant in this situation argue that its lease has been frustrated?​​

The background

In October 2014, the European Medicines Agency (the “EMA”) entered into a lease of part of 25-30 Churchill Place, Canary Wharf (the “Property”) for a period of 25 years. Due to the referendum result in June 2016, the United Kingdom’s subsequent decision to invoke Article 50 of the Treaty of the European Union (the “TEU”) and its anticipated departure from the European Union (or rather its withdrawal from the TEU and the Treaty of the Functioning of the European Union (the “TFEU”)), as well as the EMA’s obligation, pursuant to Regulation (EU) 2018/1718, to move its headquarters to Amsterdam, the EMA indicated early to its landlord that it intended to treat its lease as having been frustrated. ​

What is frustration?

Frustration, or the doctrine of frustration, is an argument that a contract should be prematurely brought to an end due to the occurrence of an event after its execution that meant it had become incapable of being performed as the nature of the outstanding contractual rights and/or obligations had significantly changed from what the parties would reasonably have contemplated at the time the contract was entered into.

If such a supervening event had occurred, the argument is that it would be unjust to continue to hold the parties to the contract and both parties would legally be declared as discharged from their respective obligations under it.

As Bingham LJ explained in J Lauritzen AS v Wijsmuller BV, The “Super Servant Two”, and as quoted by Mr Justice Marcus Smith in this case, frustration has evolved to mitigate ‘common law’s insistence on literal performance of absolute promises.’

The case

The EMA argued that the United Kingdom’s exit from the European Union caused it to lose certain privilegesconferred by both the TEU and the TFEU necessary to its functioning and independence; that, as a matter of law, not the EMA nor any other agency of the European Union could be located in or continue to use the Property, nor would it have any power to meet its obligations under the lease anyway; and, due to it needing to be relocated under the aforementioned regulation, that it would ultimately have to pay rent twice which would impair its “capacity, effectiveness and independence.”

The Landlord argued that the grounds put forth by the EMA could not amount to an event capable of frustration and, in the interests of certainty, sought an early resolution to the matter.

The case ended up in the High Court in February of this year.

The judgement

Unfortunately for the EMA, Mr Justice Marcus Smith judged that despite a departure by the United Kingdom without the ratification of the Withdrawal Agreement, the EMA would continue to have the powers it needed to meet its obligations under the lease and even if it did not, ‘this was not a matter that the English law of frustration will have regard to’. He considered what the outcome would be if he was wrong and this could be such an event, but, it was said, the EMA’s case was not assisted by the European Union’s decision to move its activities to Amsterdam, which itself amounted to an election, a “self-inflicted” situation, which itself effectively thwarted the EMA’s claim for frustration. 

Its effect on commercial tenants

This was an interesting case on a topical subject matter which will be of interest to those tenants whose businesses may be, or may have already been, impacted by the United Kingdom’s anticipated or eventual withdrawal from the European Union

​​More information

This article looks at the case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 355. Our award winning Commercial Property Team has extensive knowledge of all aspects of commercial leases meaning they can quickly identify issues and advise on the best course of action for your business. ​This article was written by Ben Hersom, Solicitor​ at Pinney Talfourd LLP Solicitors. The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. Specific legal advice should be taken on each individual matter. This article is based on the law as of March 2019.

05/03/2019

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