Frustration of lease

Supervening illegality and common purpose

Brexit

Canary Wharf (BP4) T1 Limited v European Medicines Agency

[2019] EWHC 335 (Ch)

Summary

The High Court confirmed that Brexit will not frustrate the European Medicine Agency’s lease of its London headquarters.

Facts

The European Medicines Agency (EMA) is the tenant of premises in Canary Wharf, London let to it in October 2014 under a 25-year lease from the claimants (CW).

The lease expires in 2039 with no break option, the rent is £13m pa, and although the lease contains conditional provisions for sub-letting or an assignment, the layout of the premises as well as some of the terms of the lease may make this difficult in the current market.

In August 2017, EMA wrote to CW stating that “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 issued the proceedings for a declaration that the lease would not be frustrated in the event of Brexit and that EMA “will continue to be bound by all of its covenants and obligations in the Lease”

Issues

EMA’s case on frustration proceeded on two broad bases:

  1. That this was a case of supervening illegality because the EMA would lose its vires to handle immovable property and no longer be lawful for it to pay rent once the UK is no longer a Member State of the EU; and
  2. That this was a case of frustration of common purpose because both parties to the lease intended the premises to be used as the EMA’s headquarters.

Decision

Both of EMA’s bases for arguing frustration were rejected by the Judge in his 95-page judgement.

Frustration by reason of supervening illegality

Marcus Smith J. rejected this on the basis that while the protections conferred on the EMA by the relevant EU regulations would be reduced as a result of the UK's departure, the EMA would still have capacity to deal with immovable property in a non-EU country and, therefore, have capacity to continue performing its obligations under the lease. As such, there was no frustration by supervening illegality. This was despite the court acknowledging that the EMA was obliged by a 2018 EU regulation to move its headquarters to Amsterdam, and that there were strong political reasons for the EMA not to remain in the UK after Brexit.

The Judge proceeded to consider that even if there were constraints on the EMA’s capacity or vires, these were irrelevant to the question of frustration by reason of supervening illegality as such constraints were not a matter that the English law of frustration took into account. However, the Judge went on to hold that even if he were wrong on that point, this was a case “where the legal effects on the EMA of the United Kingdom’s withdrawal from the European Union could have been, but were not, ameliorated by the European Union”. The Judge held that this failure is relevant to the question of frustration, and in his judgment, rendered the frustration of the lease self-induced.

Frustration of common purpose

The Judge went on to reject the EMA’s submission that the Lease was discharged because the common purpose of the bargain, namely that the building should serve as the EMA’s headquarters, is frustrated by Brexit.

There was no common purpose outside the lease, and in fact, the parties had divergent purposes; the landlord's purpose was long-term cash flow at the highest rate and a preparedness to allow the EMA to have a say in the building's configuration provided that this was not adverse to the landlord's interests, while the EMA's purpose was for bespoke premises, flexibility on the term and paying the lowest possible rent.

The court held that the EMA’s involuntary departure from the premises, due to circumstances beyond its control, was not only merely envisaged but expressly provided for in the lease. The EMA, he held, “cannot say this is not what it bargained for”.

In addressing the parties’ submissions on questions of relative justice, the Judge stated that his view was inevitably coloured by the risk allocation that he found was contained in the lease. He held that “the EMA chose to enter into a long-term relationship, with long-term obligations. It played a role in framing those obligations: it could have opted for different premises, with a shorter lease; it could have negotiation a break and paid a (far) higher price and forgone the inducements it received. It did none of those things, but instead accepted provisions contemplating its departure from the Premises and providing for this case”.

The High Court confirmed that Brexit will not frustrate the EMA’s lease of its London HQ: “The Lease will not be discharged by frustration on the United Kingdom’s transition from Member State of the European Union to third country nor does the EMA’s shift of headquarters from London to Amsterdam constitute a frustrating event. The EMA remains obliged to perform its obligations under the Lease”.

 

 

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