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Frustrating events

Another day, another article on Brexit. But this one is a little bit different.

It concerns a dispute between the Canary Wharf Group, a property development, investment and management company, and its tenant, the European Medicines Agency (“EMA”).
The EMA is, in simple terms, attempting to get out of the remaining term of its 25 year lease of substantial premises at Canary Wharf.  Their reason? Brexit has frustrated the lease. They say, at the time the lease was entered into, Brexit was an unforeseen event and renders the contract incapable of being performed.

What is the EMA, where is it located and why does it matter?
The EMA was established in the mid-90s to provide EU Member States with the best scientific advice regarding the quality, safety and efficacy of medicinal products.
The EMA has been located in Canary Wharf since 1995. Its workforce expanded rapidly in the early 2000s and, as a result, it started looking for larger premises.  In 2011, it entered into an Agreement for Lease in respect of a new building at Canary Wharf. The Lease was completed in 2014. The Lease will expire in 2039 and the annual rent payable is in the region of £11-13 million pounds.  There is no break clause which would enable EMA to terminate the lease prior to the end of its term.

As an agency of the EU, it is a requirement of EU law that the EMA should be located in an EU Member State.  This means that the EMA is protected by EU law and enjoys certain privileges and immunities which are extended and conferred by Member States. These include the protection of premises, assets and staff working conditions (i.e. outside national employment law) to ensure the proper functioning and independence of the EU and its institutions and agencies.  At the time at which the lease was agreed and entered into, the UK was a Member State. This will change once Brexit occurs.
As a result, in 2017, some months after the referendum result was announced, the remaining EU Member States decided to move the EMA headquarters from London to Amsterdam.
Unfortunately, for the EMA, it will still remain bound by its lease with its landlord and, over the course of the next 21 years, will be required to pay hundreds of millions of pounds in rent.

The EMA is arguing that Brexit is a frustrating event, in the legal sense.
Broadly, a contract (including a lease) may be frustrated if an unforeseen event occurs after the contract is formed and as a result of that event the contract becomes impossible to perform and/or the obligations under the contract are transformed into something so radically different than that which could have been contemplated at the outset, that it would be unjust to require the parties to continue.
The effect of frustration is that the contract is immediately brought to an end and both parties are released from any further performance under the contract.
If the EMA successfully argues that Brexit is a frustrating event, it will mean that its lease will terminate and it will not owe any more rent under the lease.

Was Brexit reasonably foreseeable?
The EMA is arguing that:

    1. Brexit was not reasonably foreseeable in 2011 when the Agreement for Lease was entered into. In support of this, their arguments include that: (a) UKIP had secured no seats in the general election on 6 May 2010 and its share of the popular vote was around 3%; and (b) on 20 May 2010, following the general election, the Coalition Government produced a document which affirmed its commitment to the EU.
    2. Nor was Brexit reasonably foreseeable in 2014 when the Lease was completed. In support of this, they say that: (a) there was no firm manifesto promise from any major political party that an in/out referendum would be held; (b) no referendum had been planned; and (c) the majority of expert commentators predicted that if a referendum were to be held, the UK would vote to remain in the EU.
    3. The parties did not regard Brexit as likely to occur or foresee it as a real possibility in 2011 or 2014. Although legal advice was provided to the landlord relating to the impact of EU law on the lease, it did not consider the possibility of Brexit because, it is argued, it was simply assumed by both parties that the UK would remain in the EU.
    4. The consequences of Brexit will so significantly change the nature of the parties’ outstanding obligations under the agreements from what the parties could have reasonably contemplated at the time that it would be unjust to uphold it in those circumstances. For example, under EU law, the EMA must be located in an EU Member State.  The EMA would not be able to remain at the premises and no other EU entity could relocate there either

What next?
The trial is due to take place in January 2019, in advance of the UK’s planned exit from the EU on 29 March 2019.
Whilst the outcome will be specific to the facts of this particular case, if the EMA is successful, other tenants may well seek to use Brexit as a means of avoiding their contractual liabilities, which could lead to greater uncertainty for landlords and businesses alike.

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Rachael Donnelly

Associate Solicitor
Property Disputes
0113 207 1094
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