Brexit is not that frustrating

Allyson Colby offers her analysis of the highly anticipated decision over the European Medicines Agency’s office lease in Canary Wharf Key points Brexit will not frustrate a lease to the European Medicines Agency (EMA) The EMA can lawfully retain and deal with its London premises, despite Brexit The parties did not enter into the lease for a common purpose that will be thwarted by Brexit Alienation provisions in the lease should be allowed to do their job Many were saddened by the news that the European Medicines Agency (EMA) would leave London. Picture, however, the dismay of its landlord, who spent more than £40m to induce the EMA to sign a 25-year lease of offices in Canary Wharf at a rent of £13m per annum. The lease was signed in 2014 and had barely begun when the United Kingdom voted to leave the European Union. In turn, the EU announced that the EMA would exit the UK and passed Regulation 2018/1718 requiring it to open new headquarters in Amsterdam, which are under construction. But the EMA estimates its liabilities under its London lease as being approximately £500m. How will it afford two headquarters buildings, one of which will be unoccupied, for the next 20 years? The EMA indicated that it regarded Brexit as a frustrating event that will end its London lease. Hence the litigation in Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 Ch;[2019] PLSCS 37. Faced with the prospect of losing its tenant, the EMA’s landlord sought a declaration that the lease will continue, despite Brexit. Frustration A contract will be frustrated if a supervening event, over which the parties have no control, makes performance impossible. The event must be unexpected and must have such a profound effect that it would be unjust to require the contract to be performed. But the courts will not rescue parties from the consequences of their own actions or omissions, or from imprudent commercial bargains. It was once thought that the law on frustration did not apply to leases. In Krell v Henry [1903] 2 KB 740, the court ruled that a contract to hire premises in Pall Mall, which overlooked a processional route, was frustrated when Edward VII fell ill and postponed his coronation. In National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675, the House of Lords described the Pall Mall contract as a “licence”. However, the Lords did accept that leases are “not inherently unsusceptible to the application of the doctrine of frustration”, although they suggested that cases in which the doctrine could be invoked would be rare. Would the EMA decision be the first such case? Many of those who ventured an opinion suggested that the doctrine of frustration did not apply. But the property industry held its breath and all eyes – including, no doubt, those of the EU – turned to Mr Justice Marcus Smith when he delivered his decision. He ruled that, although the UK’s decision to withdraw from the EU was a theoretical possibility when the agreement for lease was signed in 2011, it was not “relevantly foreseeable”. However, the lease will not be frustrated, even though Brexit is a seismic event. Illegality The EMA had argued that it was not responsible for the decision to relocate. It had been unable to dispose of its lease and, because European law prevented it from having headquarters outside the EU, it should not be held to a contract whose performance was ultra vires. The judge ruled that EU Regulation 2018/1718 was not actuated by legal necessity. There were strong political and other reasons for locating European agencies within the EU. But there was no legal justification for the argument that the EMA lacked the legal capacity to hold on to, or divest itself of, immoveable property outside its territory. So it would not be ultra vires for the EMA to pay rent and perform its obligations under the lease after Brexit. Even if this were wrong, the lease would not be frustrated. Capacity is relevant before contracting with a foreign entity. But, in English law, changes to capacity wrought by foreign law will not frustrate contractual liabilities that have already been assumed. In Krell, the premises in Pall Mall were advertised as having windows that would provide a view of the coronation procession, and were hired for that reason. So a contract may be frustrated if the parties share a common purpose, which is then thwarted. Did the parties have a common purpose here: that the premises would be the EMA’s headquarters throughout the term, failing which the lease would have no use? The judge ruled that the parties had different objectives (even though the property included features bespoke by the EMA), citing the user and alienation provisions in the lease in support of his reasoning. Self-harm The judge ruled that the EMA’s departure was entirely due to the 2018 Regulation passed by the EU. The frustration was self-induced and it lay “ill in the mouth” of the EMA to argue that its obligations under an agreement, approved by the EU, should now be discharged because it had voluntarily assumed additional obligations, apparently without considering the financial implications. The EMA had consciously entered into a lease without a break clause. It could have opted for different premises, with a shorter lease. Or it could have insisted on a break right, paid a higher rent and foregone the financial inducements that it had received. Instead, the parties had catered for the possibility that the EMA might wish to leave the premises by enabling it to assign or sub-let, and the alienation provisions in the lease must now do their job. The EMA is bidding farewell to the UK. But its name will remain on the lease of its London premises and it will have to comply with its rental and other obligations under the lease, unless it can persuade a superior court to overturn the judge’s decision. Allyson Colby is a property law consultant