Lease is the Word – High Court determines that Brexit cannot frustrate a Commercial Lease Agreement

Lease is the Word – High Court determines that Brexit cannot frustrate a Commercial Lease Agreement

Little over a month ago, property professionals and legal commentators were reflecting on the potential ramifications of the significant case of Canary Wharf (BP4) T1 Limited (‘Canary Wharf’) –v- European Medicines Agency (‘EMA’).

The outcome of this case had the potential to re-shape domestic law, lead to adverse repercussions for institutional commercial landlords and impact the political dealings between the UK and the EU. (Click here to read more about the history).

On 20 February 2019, with just under forty days until the United Kingdom is set to leave the European Union, the High Court ruled in favour of Canary Wharf.

What did the court conclude?

Put simply, Brexit cannot frustrate the contractual provisions of a commercial lease and thus allow a tenant to walk away from their obligations.

Mr Justice Marcus Smith assessed the doctrine of frustration, identifying the two particular types of frustrating event that EMA were contending had arisen – that of ‘supervening illegality’ and ‘common purpose’.

  • Supervening illegality – this occurs when ensuing changes to the law prohibit the performance of a contract and thus frustrate the contract. The court found that the lease had not been frustrated by reason of supervening illegality because there were no constraints on the capacity of the EMA to continue to use/dispose of the property.
  • Common purpose – is applicable whereby a frustrating event defeats the purpose for which a contract has been entered into (for both parties). The court concluded that there was no common purpose between the parties as they had approached the agreements as ‘counterparties’ and ‘bargained hard’ to both get what they wanted.

Concluding his judgment, Justice Marcus Smith confirmed that English law had ‘evolved a doctrine’ (i.e. frustration) and that EMA had ‘subscribed to a lease governed by English law.

What does this case mean for Commercial Landlords going forward?

Commercial Landlords now have a degree of certainty that Brexit cannot provide a lawful excuse for occupiers to walk away or avoid their obligations under a lease.

The property market (and to the same extent, the courts) can be confident, due to the outcome of this case, that there will not be a wave of ‘EMA-esque’ litigation and therefore a mass exodus of tenants is not on the cards (for the time being).

Considerations for Commercial Occupiers

What lessons can be drawn for future commercial occupiers seeking to enter into lengthy expensive tenancies?

Firstly, the importance of a negotiated break clause cannot be underestimated and in this instance may have given the EMA an earlier option to determine the lease. Secondly, the fact that that EMA has taken a long lease (25 years) has shackled it to the obligations of the lease and perhaps, a shorter lease would have lessened the financial blow that it has had to take.

Whilst the decision might be a bitter pill to swallow for the EMA, it ultimately reinforces the reluctance of domestic courts to depart from the established position that political events (even as seismic in proportion as Brexit) are not capable of frustrating a commercial lease.

What next for EMA?

There are several avenues open to EMA, some of which are considered below:

1) EMA appeal

EMA could decide to appeal the decision, which might be influenced by the outcome of current negotiations between the UK and EU.

If a deal is negotiated between the UK and EU, there is expected to be a transition period under which the UK would remain under the jurisdiction of the European Court of Justice (ECJ) until the end of the said period. If there is a deal and the case is successfully appealed through the UK Courts, the matter could reach the European Court of Justice (ECJ). Timing may be key in this respect.

On the other hand, if there were a ‘no-deal’ scenario, the highest court of appeal for the EMA would be the Supreme Court of the United Kingdom, they would not have the benefit of appealing to the notionally more sympathetic ECJ.

2) EMA alienate their lease

The term ‘alienation’ refers to the ability of EMA to transfer whole or part of their ownership of land under the lease for the remainder of the term. EMA could alienate their lease by way of assignment or underletting in order to lessen their financial and operational burden.

3) EMA Surrender

Another possible option for the EMA would be to negotiate an agreed surrender figure with Canary Wharf, to allow them to walk away from the lease.

Given the colossal rental sums due under the lease from EMA, Canary Wharf is likely to demand a sizeable surrender payment and produce an extensive dilapidations schedule in return (after all, the premises was fitted out specifically for the EMA). Yet, given the demand for office space in the Canary Wharf/Docklands area (not to mention the steady demand for office space in London overall) finding a new tenant for the premises is not going to be too difficult for Canary Wharf.

How can Blaser Mills Law help?

Our highly-experienced Real Estate lawyers act on behalf of commercial landlords and occupiers, individuals and companies, as well as advising on commercial property portfolios. Complemented by our Property Litigation team, we can provide a seamless crossover between contentious disputes and transactional property matters.

If you are a landlord or tenant, considering your options in ending a commercial lease, or would like advice on an existing or proposed commercial lease, please do not hesitate to contact our Real Estate and Development team on 020 3814 2020