On 20 February 2019, Mr Justice Marcus Smith handed down his highly anticipated judgment in Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 Ch; [2019] PLSCS 37 and found that the European Medicines Agency’s (EMA) lease of premises at Canary Wharf will not be frustrated by Brexit.
This was the first significant property-related Brexit judgment and the EMA has until 29 March to apply for permission to appeal.
The background
In August 2011, the EMA signed an agreement for lease for office space at 25-30 Churchill Place and in October 2014 a 25-year lease was completed without a break clause. When Article 50 was invoked, the EMA told Canary Wharf that Brexit would frustrate its lease and Canary Wharf applied to the High Court for a declaration that it would not.
The decision
In the current climate of Brexit uncertainty, the property industry breathed a collective sigh of relief on receipt of the judgment. Brexit is no longer threatening to provide a “get out of jail free” card to tenants with European client bases who may, as in this case, have received a significant inducement package. Nonetheless, it is worth noting that the effects of this judgment are not Brexit-specific and will still be felt once Brexit is a distant memory.
The EMA contended that the lease was frustrated by supervening illegality and/or that the common purpose of the parties would be frustrated by Brexit.
Supervening illegality
The judge rejected the EMA’s argument that a reference should be made to the Court of Justice of the European Union on whether the EMA would have capacity to perform its lease obligations post-Brexit. The judge also held that:
(i) if the EMA did lack capacity post-Brexit, that would not be a factor which the law of frustration would properly take into account; and
(ii) even if the judge’s findings on capacity were wrong, the lease would not be discharged as the passing of the November 2018 Regulation requiring the EMA to relocate to Amsterdam is an example of self-induced frustration.
The judge’s findings on self-induced frustration are surprising as the EMA is a legal entity distinct from the European Parliament and Council that passed the November 2018 Regulation. Even though the judge’s findings on this point only come into play if he is wrong on the EMA’s capacity, this may provide the EMA with a peg on which to hang its arguments for appeal.
Common purpose
The EMA argued that the parties had a common purpose that the premises would constitute the EMA’s headquarters.
In rejecting this argument, the court noted the divergent interests of the parties, with Canary Wharf wanting to secure long-term cash flow at the highest possible rent and the EMA wanting flexibility as to term at the lowest rent. The judge also considered the negative phrasing of the permitted user covenant which required the EMA not to use the premises other than as commercial offices.
The interests of a negotiating landlord and tenant will usually diverge in a similar way to the parties in this case. Similarly, the permitted user clause is market standard and will be another line of defence for landlords faced with tenants arguing that there is a common purpose beyond that recorded in the lease.
Foreseeability
Both parties placed weight on the foreseeability of Brexit at the time the agreement for lease was entered into and both parties adduced expert evidence on modern British political history. However, the judge acknowledged that foreseeability is a “slippery concept” and warned against framing questions of foreseeability too closely. He noted that while the EMA contended that Brexit was the frustrating event, it could alternatively be said that the frustrating event was the EMA’s involuntary need to leave the premises due to circumstances beyond its control.
By focusing on whether it was foreseeable that the EMA may have to leave the premises involuntarily during the term of the lease, the judgment is more likely to be directly analogous to future (non-Brexit related) cases concerning lease frustration.
The judge found the EMA’s involuntary departure was foreseeable for a number of reasons, including the length of the term and the fact that the alienation provisions in the lease allow the EMA to assign.
It is market practice for leases to permit the assignment or underletting of the whole and the judge’s findings will be another barrier to tenants seeking to argue frustration in the future.
Future cases
There is still no recorded case in the English courts of a lease being frustrated. However, the principle established by the House of Lords in National Carriers Ltd v Panalpina (Northern) Ltd [1980] UKHL 8 that a lease can be frustrated remains good law. Landlords should ensure that their leases allow for alienation of the whole demise and that user covenants are not unduly prescriptive in order to maximise their chances of staving off future claims of frustration.
Not the end of the road?
The EMA has until 29 March 2019 to apply for permission to appeal. Given the amount of money at stake and the importance of this case, we anticipate that it will apply for permission. We could even see a leapfrog appeal to the Supreme Court. An appeal also opens up the possibility of a reference to the CJEU, which might make UK landlords nervous.
It will be interesting to see whether any grounds of appeal are limited to the judge’s findings on supervening illegality or if the reasoning on common purpose is challenged too.
Alison Hardy is a partner and Chloe Meredith an associate at Ashurst
