Is the withdrawal of the UK from the European Union such an extraordinary event that it would make the private agreement between parties to enter into a lease of commercial premises impossible to legally fulfil? If it were such a unique event, it would allow the tenant to walk away from a 25 year lease without paying any further rent or meeting any of its other obligations under the lease after the UK left the EU. In other words, is the fact of Brexit sufficient to frustrate a private commercial lease?
This was the question before the High Court in the dispute between Canary Wharf and the European Medicines Agency.
On 20 February, Mr Justice Marcus Smith decided that Brexit is not such an extraordinary event.
The European Medicines Agency (EMA) is an Agency of the European Union whose role is to evaluate the efficacy of medicinal products which are to be offered for sale within the EU. Prior to the Brexit vote, the EMA’s headquarters were located in Canary Wharf where it held an underlease of part of 25-30 Churchill Place.
Following the Brexit vote, the EMA wrote to its landlord stating that “if and when Brexit occurs, we will be treating that event as a frustration of the lease”. If the EMA was right and the lease was frustrated by the UK’s withdrawal from the EU, then it would be able to walk away from its 25 year lease with no consequences and no further payments to the landlord.
Canary Wharf, the landlord under the lease, wanted to protect its position and have certainty. It therefore took proceedings in the High Court seeking a declaration that “the withdrawal of the UK from the European Union will not cause the lease to be frustrated”.
The legal doctrine of frustration allows a contract to be ended prematurely where a subsequent event has made the performance of the contract, in the way that it was contemplated by the parties at the date they entered into the contract, impossible.
The legal authorities which defined frustration prior to this case described a frustrating event as being, to paraphrase, an event which so significantly changes the nature of the outstanding contractual rights and obligations of the parties that it is unjust to hold the parties to those obligations and they are discharged from further performance of their contractual obligations.
The EMA’s case was that the lease was frustrated by Brexit for a number of reasons which it asked the court to consider both individually and in combination:
Mr Justice Smith rejected the EMA’s arguments.
He held that the purpose of the parties, their “common purpose”, was to enter into a lease which would allow the EMA to occupy the premises belonging to Canary Wharf on terms that were acceptable to both parties. The parties may each have had other purposes in entering into the lease, but the formation of a binding lease was their only common purpose. The fact that the EMA’s other purposes in occupying the building to fulfil their mission as an EU agency could no longer be met after Brexit did not affect the legality of the lease.
The EMA had had the legal capacity to enter into the lease when it did so. The fact that it might no longer have that legal capacity after the Brexit date did not mean that the lease it had entered into was frustrated by its subsequent loss of capacity.
As no event had taken place to frustrate the lease, questions of relative justice did not arise.
The withdrawal of the United Kingdom from the EU did not make the lease illegal nor did it frustrate the common purpose of the parties when they entered into the lease.
Despite the very clear and forthright ruling, there is absolutely no doubt that this decision will be appealed. The judge, clearly a man with a dry sense of humour, has extended the time allowed for the parties to lodge an appeal to 29 March 2019, which until very recently was expected to be Brexit day!