Canary Wharf wins Brexit lawsuit: EMA’s lease not frustrated

Canary Wharf Group has won a closely watched lawsuit it brought against the European Medicines Agency over the consequences of Brexit. Ruling today (20 February), Mr Justice Marcus Smith said that Brexit is “not a frustrating event” and that the EMA remains obliged to perform its obligations under the lease. He said: “I conclude that the lease will not be frustrated on the withdrawal of the United Kingdom from the European Union. This is neither a case of frustration by supervening illegality nor one of frustration of common purpose. “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.” Canary Wharf had been asking a judge to decide whether Brexit triggers the rarely used legal doctrine of “frustration” in the case of the EMA and its £13m-a-year lease of premises at Churchill Place, E14. The lease runs until 2039 with no break clause. Both sides have had much riding on the outcome. During the hearing, lawyers argued that a ruling that Brexit is a “frustrating event” would mean that the EMA could walk free of the lease – something that could encourage other tenants affected by Brexit to make similar claims. Giving evidence during the trial, Canary Wharf Group chief executive and chairman Sir George Iacobescu said that, because of the financing arrangements of the building, if the lease is frustrated then “immediately we lose £264m”. Alison Hardy, partner at Ashurst, welcomed the “resounding” judgment in Canary Wharf’s favour as “not just good news for the UK property market but for the UK economy as a whole”. She said: “It is unlikely, given today’s judgment, that others will be brave enough to raise arguments of frustration, and those who do bring claims are unlikely to be successful. However, this judgment may not be the end of the story.” She explained that the EMA has an extended period in which to appeal, until 29 March 2019 – the Brexit date itself. She added: “Given the amount of money in dispute, of around €400m, I’d be amazed if the EMA didn’t appeal. The next question is whether the appeal will go straight from the High Court to the Supreme Court. Given the importance of this case, I think there is every chance that it will.” Ben Hatton, director of property litigation who led the successful Clifford Chance team representing Canary Wharf, said: “We are pleased to secure this victory for Canary Wharf Group. The judge has ruled that Brexit does not amount to an event of frustration of the EMA’s lease, and this result will be welcome news in the property and legal market, bringing greater certainty as to the impact of Brexit on contracts.” Julian Joseph, real estate partner at Shakespeare Martineau, said it had been a “bold move” by the EMA to attempt to use Brexit as a reason for early release from its lease, adding: “However, the judge’s decision is unsurprising and sends a clear message to the commercial rental market that lease conditions and terms are there to be adhered to. “Had the EMA been successful, lenders and investment values would have been affected, with an adverse decision increasing downwards pressure on valuations in an already volatile real estate market.” Iacobescu said: “We have always firmly believed that Brexit did not amount to a frustration of the EMA’s lease. We fulfil our contracts and expect other parties with whom we enter contracts to respect the law and their own obligations, particularly in the case where a party is created and backed by an international institution. “If the EMA had been successful, it could have undermined fundamental principles of English law and set an unfortunate precedent. We will continue to co-operate as landlords with the EMA, as provided for contractually in our lease agreement.” The decision in detail In his ruling, the judge said that, while the EU may not want to have the headquarters of one of its agencies in a non-EU country, there was no legal reason why it should not. He said he was “completely confident” that the EMA’s capacity to deal with immovable property in what would become a third country remains and that “the European Union itself has the capacity to maintain the headquarters of one (or more) of its agencies in a third country”. He added: “I entirely accept that there are many and good reasons why the European Union would choose not to do so, but these reasons have nothing to do with the capacity of either the EMA or the European Union.” On the lease itself, the judge said that Canary Wharf and the EMA had negotiated what they would do should the EMA wish to leave: “The parties agreed exactly what would happen in such a case: the EMA would assign the lease – pursuant to the terms of the lease – or sublet the whole – again, pursuant to the terms of the lease. If it could neither assign nor sublet the whole according to the terms of the lease, it would retain the premises, whether it wanted to or not, and would be obliged to pay the rent.” While he acknowledged that Brexit is “a seismic event”, he said it doesn’t change the fact that the parties had negotiated an “out clause”. Click here to read a transcript of Canary Wharf Ltd v European Medicines Agency To send feedback, e-mail jess.harrold@egi.co.uk or tweet @estatesgazette