Speculation as to the effect which Brexit could have on British industry has abounded since the vote in June 2016. Much of the conversation has been just that: speculation. It is difficult to know what tangible effect Britain’s exit from the E.U. will have on business and the Real Estate sector until it actually happens.
The recent case of Canary Wharf -v- European Medicines Agency  EWHC 335 (Ch) sought to settle one thorny, Brexit-related issue prior to the U.K’s eventual departure; that of whether or not the event of Brexit in and of itself can frustrate a contract.
The doctrine of Frustration in English law holds that a contract may be discharged when something occurs after the formation of the contract which renders it physically or commercially impossible to fulfil. Examples of events which have been found to frustrate contracts include natural disasters such as a fire leading to the destruction of the subject matter of the contract or an unforeseen change in the law which would render performance of the contract illegal or unlawful (known as “supervening illegality”).
The European Medicines Agency (“EMA”) is the body which is responsible for the evaluation of medical products within the E.U. The EMA has been based in London since 1995 and, in 2011, had taken a 25 year lease (“the Lease”) of the premises at Churchill Place in Canary Wharf, London (“the Premises”). In August 2017, the EMA wrote to its landlord, Canary Wharf (“CW”), to inform it 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.”
Understandably, CW were not prepared to allow the matter to drift beyond the 29 March 2019 deadline without certainty as to the legal basis of the EMA’s stated position and so it issued proceedings in 2018 for:-
““…a declaration that the withdrawal of the United Kingdom from the European Union and/or the relocation of the [EMA] (whether inside or outside of the United Kingdom) will not cause [the Lease] to be frustrated and that the [EMA] will continue to be bound by all of its covenants and obligations in the Lease and all related documents including (but not limited to) payment of the full rents under the Lease throughout the Term of the Lease unless released by law upon a lawful assignment of the Lease properly made in accordance with its terms…”
The EMA put forward the “supervening illegality” argument and averred that after Brexit, due to changes in E.U. Law (which provided for the transfer of its headquarters to Amsterdam), the EMA would be unable as a matter of law to exercise rights conferred on it by the Lease. They also argued that when entering into the Lease, the parties had a “common purpose” over and above the traditional Landlord and Tenant relationship, which was that the Premises would be used as the headquarters of the EMA. This common purpose, the EMA averred, would be defeated by Brexit since the aforementioned change in E.U. Law meant that the EMA could not use the Premises as its headquarters.
The Court found in favour of CW and held that the Lease was not and would not be frustrated by Brexit. The Court found that there was no common purpose between the parties upon the formation of the Lease and dismissed that argument. As to the supervening illegality argument, the Court did not accept that this was sufficient to meet the threshold for frustration because, amongst other reasons, E.U. Law would continue to apply during the U.K’s phased withdrawal and that the winding down of the EMA’s operations had already been provided for by the E.U.
Narrowly interpreted, the decision is not surprising. The bar for frustration of a contract has always been a high one to clear and this decision is in keeping with that approach. In the wider context of the risks posed to commercial landlords by Brexit, the decision will be a welcome one. If the decision is upheld at the EMA’s pending appeal, it will show that Brexit cannot be used as a “get out of jail free” card and that it will not automatically have a substantial impact on long-established legal principles relating to the interpretation and enforceability of leases.