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Landlords will welcome the ruling from Mr Justice Smith that Brexit does not operate to frustrate the terms of a lease. In the recently heard case concerning the European Medicines Agency (EMA) Headquarters in London, the Court ruled that European Organisations cannot use Brexit as an excuse to walk away from their leases.
In 2014, the EMA signed a 25-year lease of a newly built 20-storey tower at Canary Wharf. As a result of Brexit, in November 2018 the EU passed a Regulation setting Amsterdam as the EMA’s Head Quarters from March 2019.
The EMA’s lease does not include a break option that would allow them to terminate the lease early. The rent is approximately £14million per year, leaving an outstanding liability in the region of £400million for the remainder of the term. This has left the EMA in a difficult position.
Sub-letting or an assignment may have been an option, but this may prove difficult as it is widely thought that the lease terms secured by the EMA were a “bad deal”.
What was the EMA’s Argument?
The EMA were hoping to rely on the legal doctrine of frustration, which allows a contract to be brought to an end if an unforeseen event occurs, which results in the contract becoming impossible or illegal to perform. Case law has established that frustration of a lease is possible, although it was suggested that circumstances where it would apply would be “not never, but hardly ever”.
In an attempt to gain some clarity on the position, the landlord, The Canary Wharf Group, asked the court for a declaration that Brexit will not frustrate the lease.
Was the Frustration Foreseeable?
The EMA argued that the frustrating event, Brexit, was unforeseeable at the time the parties entered into the contract. This would not be in 2014 when the lease completed, but in 2011 when the parties entered into the agreement for lease. In a preliminary hearing on 26 September 2018, the court ruled that expert evidence would be permitted in order to consider what would have been publicly available in 2011.
Is retaining the Lease Impossible or Unlawful?
The EMA also argued Brexit has made the performance of its obligations impossible and/or unlawful. Following the EU ruling in November 2018, the EMA argued that not only is it impossible for EMA (As an EU entity) to have its Head Quarters not in an EU Member State, but that it would be unlawful and contrary to the ruling for them to do so.
The Court established that it was difficult to argue that the lease has been legally frustrated. Had the judge decided that the lease had been frustrated, the implications would have been profound, not only for the landlord in terms of diminution in value of its estate, but more widely in terms of the value of property throughout the UK and the uncertainty that such a decision would have introduced.
The decision leaves the EMA liable under the terms of the lease with a potential of £500 million payable in rent. Given the sums in question it is possible that the EMA may seek to appeal the decision. The EMA has until 29 March to lodge its appeal and, if it does, given the importance of the matter, it is likely that it would be heard by the Supreme Court.
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