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Frustration with Brexit within the UK Property Sector?
Frustration with Brexit within the UK Property Sector?

Since the decision was made for the UK to leave the EU, businesses have been considering what the legal and practical implications may be for them. There is little certainty.

In a landmark case for the UK property sector (Canary Wharf (B4) T1 Ltd and others v European Medicines Agency [2019] EWHC 335 (Ch) the High Court was asked to consider whether the European Medicines Agency (“the EMA”) was entitled to walk away from its lease of a building in Canary Wharf…using “Brexit” as its justification.

Who were the parties and what was in dispute?

The EMA is an agency of the European Union. It held an underlease of part of 25-30 Churchill Place in Canary Wharf, for a term of 25 years.

EMA’s landlord, part of the Canary Wharf estate (“CW”) brought a claim against EMA after receiving a letter from it stating the following:

“Having considered the position under English law, we have decided to inform you that if and when Brexit occurs, we will be treating that event as a frustration of the Lease”.

CW commenced proceedings against the EMA as it took the view that the commercial uncertainty created by this contention needed an early resolution, a positon accepted by both parties. CW sought a declaration from the courts that the withdrawal of the UK from the EU and/or the relocation of the EMA would not cause the lease to be “frustrated” and the EMA would continue to be bound by all its covenants and obligations under the lease.

What is “Frustration”?

“Frustration” is a concept in English law which means that a contract can be brought to an end because of a supervening event, without blame or fault of either party. The EMA argued that the withdrawal of the UK from the EU would cause the lease to be frustrated because the withdrawal would trigger a number of legal changes relating to the EMA’s legal capacity to continue with the lease.

The Legal Arguments:

In particular, the EMA’s argument was that as a matter of law, it is necessary for an EU agency to have its headquarters in a Member State (hence the EU ordered that the EMA must relocate its headquarters to Amsterdam) and therefore it could not continue to make use of the lease after Brexit. The EMA argued it would be paying “double rent” for headquarters buildings (one of which it could use, in Amsterdam, and one in which it could not, in London) which would affect its capacity, effectiveness and independence.

Further, the EMA stated it would be outside the EMA’s legal capacity (or ultra vires) for it to either continue to pay rent or to deal with the property by sub-letting or assigning the lease.

An added complication to this matter was that the event said to frustrate the lease lies in the future and it would be impossible to say (and not for a judge to speculate) what the position on 29 March 2019 would be.

What did the Court decide?

Mr Justice Marcus Smith heard the case over 9 days in January 2019 and handed down judgment (which consists of 100 pages) on 20 February 2019.

The Court found in the landlord’s favour and concluded that the lease would not be frustrated on the withdrawal of the UK from the EU.

The Judge stated that the EMA remained obliged to perform its obligations under the lease, including a potential rent bill of £500 million. The Court concluded that the EMA had the capacity, post the withdrawal of the UK from the EU, to continue to use and/or dispose of the premises and that had the capacity to pay rent pursuant to the lease. Therefore the lease was not frustrated on grounds of illegality.

Further, the Court decided that whilst Brexit was not relevantly foreseeable at the time the agreement for lease was entered into in 2011, it was foreseeable that over the long duration of the lease, there may be some development that would require the EMA involuntarily to have to leave the premises due to circumstances beyond its control. The Court found that the “common purpose” of the lease had not been frustrated due to Brexit, the EMA had assumed the risk of having to leave the premises against its will and this was reflected in the terms of the lease.

What is the impact of the decision?

Landlords can breathe a sigh of relief after reading the outcome of this high-profile case. It is difficult, based on the Judge’s comments to envisage a situation in which a party may be able to argue that a contract has been frustrated due to Brexit.

However, in a further decision on 1 March 2019, the Judge has granted permission to the EMA to appeal against his decision to the Court of Appeal. He held that the appeal had a real prospect of success and that there was a compelling reason to grant permission, in particular the importance of the case. It is possible that, given the shortage of time until 29 March 2019, the appeal could leapfrog straight to the Supreme Court… so watch this space!

For more information on this case or to discuss your commercial property and property litigation concerns further, please contact Catherine Burgess by email: cburgess@jpclaw.co.uk or tel: 020 7644 7283 or contact her on LinkedIn, or Steven Porter by email: sporter@jpclaw.co.uk or tel: 020 7644 6091 or contact him on LinkedIn.

 

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