Ahead of a trial scheduled for early next year, lawyers for Canary Wharf and its tenant, the European Medicines Agency, today clashed over how a legal action should proceed that raises the question whether the EMA’s lease has been “frustrated” by Brexit.
The action will decide whether the EMA is locked in to its lease of premises at Churchill Place, E14, which runs until 2039 at a current rent of £13m per year, with no break clause.
The full hearing has been timetabled in a window beginning on 14 January 2019, with the hope that judgment will be given before the UK’s anticipated departure from the EU on 29 March 2019.
At today’s preliminary hearing, a judge is being asked to decide procedural issues relating to witness evidence, disclosure and the trial time estimate.
If the EMA is ultimately successful in the action, it could open the way for leases and other contracts to be broken by Brexit, commentators have warned.
Unsettling implications
The order for an expedited trial was made at an earlier hearing by Mr Justice Mann, who expressed concern about the risk that the case’s potential implications may unsettle the property market.
In this action, Canary Wharf is seeking a court declaration that the withdrawal of the UK from the European Union, and the relocation of the EMA, will not “frustrate” the EMA’s lease of premises at Churchill Place, E14.
It says the EMA – which last November announced it would relocate from London to Amsterdam following the referendum result – will continue to be bound by all its obligations under its 2014 lease – including payment of rent in full for the whole term.
However, the EMA argues that, when the UK leaves the EU, it will lose privileges and immunities it currently enjoys. In addition, it claims that EU law requires it to be primarily located in an EU member state, and cites budegetary concerns of having to secure a new HQ in Amsterdam.
‘Unforeseen and unforeseeable’
It says that Brexit was unforeseen and unforeseeable at the time the parties entered into their agreement for lease, back in 2011.
Canary Wharf maintains that, even if Brexit was unforeseeable in 2011 and would have all the consequences alleged by the EMA, the lease would not be frustrated because it is a long-term property interest capable of being assigned or underlet to others, under which the EMA fully assumed the risk of political and legal change in the UK during its 25-year term.
Alison Hardy, partner at Ashurst, warned that, if the court ultimately found in favour of the EMA, it could have huge implications for the real estate sector and the economy as a whole. However, she expressed her view that it is “very unlikely” the court would find EMA’s lease had been “frustrated” by Brexit.
She said: “Frustration is a rarely used argument in property cases, and for good reason. In essence, the courts can order that a contract (or in this case a lease) is ‘frustrated’ when something happens after completion, which makes it either physically or commercially impossible to fulfil the contract, or the party’s obligation is radically transformed. This ancient doctrine dates back to 1863 and the courts have been reluctant to discharge contracts on the basis of frustration, because they don’t want to allow parties to escape from a bad bargain.
Opening the floodgates
“If the court were to order that this lease is discharged by frustration, purely on the back of Brexit, it could open the floodgates for all tenants to argue that their leases are terminated, and indeed, it could result in other types of contract being terminated. The stakes could hardly be higher – if the court ordered in the EMA’s favour, it could cause widespread uncertainty not only in the real estate sector, but in the economy as a whole.”
However, she added: “My view is that the courts are very unlikely to declare that the EMA’s lease is determined by frustration. The courts have repeatedly said that this remedy must be kept within very narrow limits and not extended. While changes in the law are a well-recognised category in which the court has ordered frustration, I anticipate that the courts will be keen to avoid allowing EMA to get out of their lease on the basis of frustration, both to limit the scope of frustration, and on public policy grounds.”
Click here to read more on Brexit and the doctrine of frustration.
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