WeWork has emerged as a possible fix for the European Medicines Agency’s lease problem in Canary Wharf, EG understands.
The agency has held discussions with multiple potential occupiers, including WeWork, to take on its troublesome lease at 25-30 Churchill Place, E14, where it occupies 250,000 sq ft.
It has retained BNP Paribas Real Estate, which advised on the original 25-year letting, to look for occupiers.
The EMA and Canary Wharf Group are due to appear in court this week. The EMA, which is relocating to Amsterdam after Brexit, is aiming to get out of the office lease it agreed with CWG, which began in 2014 and is due to end in 2039. It claims that the UK’s decision to exit the European Union was unforeseen at the time the agreement was made, which constitutes “frustration” of its lease – a rarely used legal mechanism that, if successful, would enable it to get out of the agreement.
The outstanding bill for the remainder of the lease, including service charges and rates, is around £500m.
The EMA is backed financially by the EU, as well as fee income from regulatory services. However, CWG says that the UK’s membership of the EU has been a contentious point for several years. Moreover, Article 50, which gives a member state the option to leave the EU, has been protected by law since 2007.
The landlord initiated the lawsuit with the EMA in July 2018 amid concerns around the implications for its shareholders and lenders. It argues that the rental income is necessary for the developer to repay the lenders who backed the construction of the building.
WeWork’s Canary Wharf play
It remains to be seen how talks between the EMA and WeWork will progress, but there are already some potential obstacles in the way.
Any sublet would ultimately be subject to the consent of CWG. It is understood the landlord would ask the EU or the EMA to be a guarantor, should the EMA opt for a tenant with more risky covenants, such as a co-working provider.
WeWork’s leasing model is based on using subsidiaries to take out leases, which lowers its risk as the parent company is therefore not liable.
Serviced office providers such as WeWork are also unpopular with some landlords because of the gains they can make on the arbitrage between their cheaper rent and the fees they charge customers. This has given them a reputation for lowering the landlord’s value.
Alison Hardy, real estate litigation partner at law firm Ashurst, highlights some other potential concerns. “There are some restrictions on assigning and subletting in the EMA lease. When the EMA is looking for an assignee or subtenant, they will have to ensure that they meet the restrictions in the lease,” she says.
Hardy adds, “For example, the lease prevents the subtenant sharing occupation of their premises. If WeWork (or any co-working provider) were the proposed assignee, Canary Wharf Group could refuse consent to sublet on the basis that they believe the subtenant will breach the lease by the very nature of their business.
“The question, then, is whether a co-working entity’s business is that of sharing occupation, which would be a breach of the lease (and sublease).”
Cut investment
Last week, WeWork rebranded as The We Company, in a bid to reassure investors that the loss-making shared office firm has future growth prospects.
The move came as WeWork’s biggest investor, Japan’s SoftBank, reduced its planned investment for this year from $16bn (£12.5bn) to $2bn.
The new brand encompasses three divisions: WeWork, which runs serviced offices; WeLive, its co-living residences; and education business WeGrow.
It is not the first time WeWork has attempted to enter Canary Wharf. In 2016, WeWork withdrew from talks to lease space in the area. It opted to abandon plans to lease 45,000 sq ft at the 7 Westferry Circus building. It was the first time WeWork had cancelled a deal in London.
Despite the drawbacks of the co-working model, the EMA is under pressure to assess all options. To date, no one has successfully argued that a tenant should be allowed to terminate their lease early on the basis of frustration.
Hardy comments: “The courts have held that a lease is theoretically capable of frustration, but judges are very reluctant to allow parties to back out of what later seems like a bad deal. As a result, frustration has become an unfashionable argument and not something that people have run for a long time.”
CWG, WeWork, the EMA and BNP Paribas Real Estate all declined to comment.
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