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Canary Wharf (BP4) T1 Ltd V European Medicines Agency [2019] EWHC 335 (Ch): UK’s Exit From The EU Will Not Frustrate Lease

Canary Wharf (BP4) T1 Ltd v European Medicines Agency [2019] EWHC 335 (Ch): UK’s exit from the EU will not frustrate lease

Preeti Ahluwalia

Preeti Ahluwalia

Preeti Ahluwalia holds a Master's degree from the University of Leeds, UK, and is now working as a Legal Research Associate at Delhi High Court, India. She is particularly interested in the field of Law and Technology.

On the 20 Feb 2019, the England and Wales High Court (Chancery Division) has handed down a judgment, in the highly anticipated case of Canary Wharf (BP4) T1 Ltd v European Medicines Agency (the “EMA”), stating that a tenant’s lease is not frustrated by Brexit. This case provides commercial certainty for contracting parties bracing themselves for Brexit across England and Wales, at a time where uncertainty is otherwise rife. Further rejecting the plea of the EMA, held that the judgment will discourage other contracting parties from claiming that Brexit frustrates their contracts.

Link to the Judgment: [2019] EWHC 335 (Ch)

The principle of frustration is a rarely used legal doctrine that permits a contract to be brought to an end when something unforeseen happens after the contract was entered into, that makes the contract either impossible to fulfill, or converts the obligations into something radically different to those at the start. For a contract to have been frustrated, the event in question must be fundamental to the terms of the contract, and do more than simply make it less convenient or more expensive.

The facts

The EMA, an agency of the EU, is a tenant of CWG at 25-30 Churchill Place in Canary Wharf, London. The Lease was entered into in 2014 and runs for a term of 25 years up to 2039 with no break clause. The lease is believed to cost £500m over the duration of its 25-year term.

The EMA asserted that if and when Brexit occurred they would be treating that event as frustrating their Lease. CWG’s position was that Brexit would not result in a frustration of the Lease and commenced proceedings seeking a declaration that “the withdrawal of the UK from the EU and/or the relocation of the EMA will not cause the Lease to be frustrated”.

In arguing that the Lease would be frustrated, the EMA relied upon two types of frustration:

  1. Frustration of Common Purpose. The EMA contended that both parties to the lease intended the premises to be used throughout the term as the EMA’s headquarters and that Brexit would thwart this common purpose.
  2. Frustration by Supervening Illegality. The EMA claimed that after the withdrawal of the UK from the EU it would no longer be lawful for the EMA to make use of the Premises, and therefore to pay rent to CWG pursuant to the Lease, as the EMA would be acting ultra vires or without capacity.

Issues

  1. Did Brexit cause The European Medicines Agency’s lease to be frustrated by supervening illegality?
  2. Alternatively, was this a case of frustration of a common purpose?

Arguments and the High Court’s response

The Court considered all of the facts and circumstances of a case when deciding whether a contract has been frustrated. The following factors were considered by the Court, and details the arguments raised and the Court’s response. These factors are applied and assessed by the court in all types of frustrations depending upon the facts and circumstances of each case.

The Lease

The terms of the lease, in particular the permitted user and alienation covenants, are relevant to the question of frustration.

The EMA argued that both parties envisaged that the EMA would occupy the premises for the entirety of the term, whereas Canary Wharf argued that the lease is not personal to the EMA and that the alienation provisions allow the EMA to assign or sub-let the premises. The judge looked to the covenants given by the EMA in relation to the permitted user, which required the EMA not to use the premises in breach of the permitted use as commercial offices, and concluded that there was no common purpose between the parties beyond that which could be derived from the construction of the lease.

The judge found that the alienation covenants in the lease evidenced that the parties had contemplated and provided for a situation where the EMA had to vacate the premises. In this regard, the case is comparable to London and Northern Estates Company v Schlesinger [1916], in which an Austrian tenant was prevented from occupying residential premises as a result of the Aliens Restriction (Consolidation) Order 1914. The court found that even though the tenant could not personally reside in the premises, he could still make use of the alienation covenants and, as a result, the contract was not frustrated.

The Court heard evidence on behalf of the EMA from BNP Paribas Real Estate Advisory & Property Management UK Limited on the efforts the EMA had made since the final quarter of 2017 to dispose of the premises. This suggests that the EMA has been unable to find someone willing to take a lease with over 20 years to run of more than ten floors with no break option. As mentioned above, frustration should not be invoked simply to allow a party to escape a bad bargain.

Foreseeability

The parties’ knowledge at the date the lease was completed is a relevant consideration. Although Mr Justice Marcus Smith referred to foreseeability as a “slippery concept” and noted that it is “no more than one factor to be taken into account”.

The EMA’s lease was granted pursuant to a 2011 agreement for lease. The EMA argued that in 2011 no person of ordinary intelligence could have foreseen that the UK could potentially leave the EU at any time up to 2039, which is when the lease ends.

Canary Wharf, on the other hand, argued that Brexit has been on the card for years. They also argued that Article 50 (i.e. the article which an EU member state invokes in order to withdraw from the EU) was introduced in the relatively recent past, when the Lisbon Treaty was ratified in December 2007, and that the possibility of a member state withdrawing from the EU must have been foreseeable from that point in time at the latest.

The judge found that whilst the theoretical possibility of Brexit was foreseeable in 2011, it was not “relevantly foreseeable”. He placed weight on evidence from the EMA’s solicitors that the first time Brexit was considered in the context of real estate transactions was not until 2016. However, Mr Justice Marcus Smith went on to find that the possibility of a development, which would require the EMA to involuntarily leave the premises, was foreseeable and contemplated in the lease.

The status of the tenant

The status of the tenant and the impact that Brexit will have on its operations is relevant to the question of frustration and is a point which the EMA relied on heavily during the hearing. In this regard, the EMA had stronger arguments for frustration than, for example, a business with a European client base would have had.

The EMA submitted that it was questionable whether they would be legally able to hold or dispose of property in a non-member state after Brexit. They also argued that, post-Brexit, the EMA would be unable to use the premises as a matter of law. However, Canary Wharf pointed out that the EU regulation, which requires the EMA to move to Amsterdam was passed in November 2018, after Article 50 was triggered, and amounts to a potentially self-frustrating event, which the EMA should not be able to use for its own benefit. The judge stated that the EMA would have the capacity to hold and dispose of property post-Brexit, but that even if he were wrong in this regard, the frustration of the lease was self-induced due to, amongst other matters, the passing of the 2018 Regulation.

Court’s Interpretation

Many businesses that want to maintain access to the single market post-Brexit have asserted that they intend to ditch or downscale their UK presence in favour of offices on the Continent. With a particular focus on the arguments raised by the parties, the factors/multi-factorial approach should be considered when assessing whether a contract of lease is frustrated.

When frustration occurs, it automatically ends the contract concerned and discharges the parties from future liability. Over the years, the courts have applied different tests for identifying frustration.

The traditional test, which was accepted by the House of Lords in Davis Contractors Ltd v Fareham UDC [1956], applies where a supervening event or circumstance renders performance of the contract radically different to the original obligation the parties contracted for.

However, there has been a move away from the traditional test in favour of a “multi-factorial” approach. This multi-factorial approach requires the courts to consider all of the facts and circumstances of a case when deciding whether a contract has been frustrated. The court will consider the terms of the contract itself, the context, the parties’ knowledge and expectations as at the time of the contract, the nature of the supervening event and the parties’ assessment of the possibility of future performance in the new circumstances.

The multi-factorial approach requires that each case be assessed on its own facts, however, it can generally be said that a frustrating event is one which:

  1. Occurs after the contract has been completed.
  2. Renders performance impossible, illegal, or radically different from what was originally contemplated by the parties.
  3. Is not due to the act or election of the party seeking to rely on it.
  4. Is not the fault of the contracting parties.
  5. Was not envisaged by the contract.

The limits of the doctrine are narrow and the courts are consistent in their message that the doctrine should not be extended. It is not a mechanism to allow a party to escape a bad bargain.

Frustration and Leases – Never or hardly ever?

When deciding that the doctrine of frustration could, in principle, apply to leases, Lord Hailsham said that his decision was “the difference between… ‘never’ and ‘hardly ever'” (National Carriers v Panalpina). It seems that Lord Hailsham was correct in this regard as, almost 38 years later, there is still no reported case in which an English Court has held a lease to be frustrated.

There are authorities that consider scenarios in which a lease could be frustrated:

  • Where a lease is entered into for the purpose of viewing a particular event, which is later cancelled. For example, in Krell v Henry [1903], a licence to use rooms for the purpose of watching King Edward VII’s coronation procession was frustrated when the procession was cancelled.
  • Where the lease provides for one principal use, which subsequently becomes illegal. In National Carriers, Lord Simon referred to the American prohibition cases where leases of premises to sell liquor were held to be frustrated following the introduction of prohibition.
  • In cases where the lease provides for one principal use, which subsequently becomes very difficult to carry out. For example, in the Scottish case of Tay v Speedie [1929] the tenants of a salmon fishery were allowed to abandon their lease following the establishment of a bombing range extending over the entire fishery.
  • Where “…some vast convulsion of nature swallowed up the property altogether, or buried it in the depths of the sea” (Cricklewood Property and Investment Co v Leightons Investment Trust [1945] AC 221).

What did the court decide in Canary Wharf (BP4) T1 Ltd v European Medicines Agency?

This is the first significant property-related Brexit case and, given the wide scope of the judge’s findings, is likely to be the last, which relies upon the doctrine of frustration. The High Court rejected both of the argued grounds of frustration. The Court concluded that EMA’s lease would not be frustrated by the UK’s withdrawal from the EU, either because of supervening illegality or frustration of a common purpose.

Supervening illegality

Mr Justice Marcus Smith found that:

  1. There were no constraints on the EMA’s capacity or vires to perform the lease covenants which would cause the lease to be frustrated
  2. Even if the EMA was prevented by European law from being able to use the Property or perform its obligations under the lease, “such supervening illegality is not a matter that the English law of frustration takes into account
  3. If the Court was wrong in relation to (a) and (b) above, this was a case where the legal effects on the EMA of the UK withdrawing from the EU could have been improved by the EU in the regulations it has passed to deal with the effects of Brexit. On that basis, the EU’s failure to do so would be relevant to the question of frustration, as any frustration of the lease was self-induced.

Common purpose

The EMA alleged that there was a common purpose between the parties of providing a European headquarters for the EMA. However, the Court found that outside of the lease, there was no such common purpose between the parties and that, in fact, their interests were divergent.

The EMA wanted modified premises, with the greatest flexibility as to term and at the lowest rent. In contrast, CW was interested in long-term cash flow, at the highest rate and where it was prepared to give the EMA some say in the buildings design. The parties agreed that EMA had the right to assign or sublet if the Property ceased to be its headquarters.

Mr Justice Marcus Smith concluded that the lease was not discharged by virtue of either the UK’s departure from the EU, nor as a result of the EMA being required to move its headquarters from London to Amsterdam.

The requirement for EMA to relocate did not frustrate any “common purpose” of the parties that the lease would provide a European headquarters. In the eventuality of the EMA relocating, the lease allowed for assignment or subletting.

Accordingly, the EMA remains bound by the lease covenants for the remainder of the 25-year term, albeit with the usual ability to assign or underlet.

Opinion

The fact that the EMA, with its special status as an EU institution, could not establish frustration reinforces how difficult it is likely to be for parties to argue that Brexit has frustrated their contracts. As such, unless the contract specifically addresses Brexit, parties are likely to be held to their contracts even if Brexit has made performance much more difficult or expensive. It is also apparent from the judge’s comments that it will be a very rare case indeed in which the frustration of common purpose argument will succeed – here the EMA didn’t even “come close” to establishing it. There may be more mileage in arguments based on supervening illegality (or impossibility) but only in the clearest cases and where the risk has not been allocated in the contract.

The judge’s finding that Brexit was not foreseeable in 2011, was perhaps not surprising, even though it was a theoretical possibility. The position would likely be harder to maintain in relation to contracts entered into nearer the date of the UK referendum (perhaps those after David Cameron’s Bloomberg speech on 23 January 2013 announcing his party’s policy to have an EU referendum), and impossible in relation to contracts entered into after the referendum result. The judge himself commented:

These days, and for the last two or so years, parties to contracts have no doubt been considering with some care what their contracts should say as regards the United Kingdom’s withdrawal from the European Union. Thus, the failure of the parties to a contract, post-referendum, to consider the inclusion of a ‘Brexit clause’, might be considered relevant to the allocation of risk.

The judgment is also interesting because it is one of the first cases where the High Court has had to consider the meaning and effect of the key legal instrument in the UK that will give effect to Brexit (the European Union (Withdrawal) Act 2018 and also the draft Withdrawal Agreement agreed politically between the UK and the EU) and the impact that these documents may have in practice, depending on how events unfurl.

Implications

No doubt this judgment will come as a welcome relief to landlords in the UK’s commercial property market. Whilst the facts of this case are relatively unusual, and heavily grounded on the legal need for EMA (as a European Agency) to relocate as a result of Brexit, had the decision gone in favour of the EMA, it could have opened the floodgates to tenants relying on Brexit to try to get out of property contract.

Appeal Unsettled

In a further decision on 1st March 2019, Mr Justice Marcus Smith decided that the EMA should have permission to appeal against his decision to the Court of Appeal, holding that an appeal had a real prospect of success and that there was a compelling reason to grant permission, namely the importance of the case. Therefore on 15th April 2019 EMA filed their appeal papers with the Court of Appeal.

Status

By July, the EMA has reached an agreement with Canary Wharf Ltd over its premises at 30 Churchill Place, London, and will withdraw its appeal against a High Court ruling that Brexit would not frustrate the lease of the property. EMA said its decision was in accordance with discussions held with the EU budgetary authorities. The organization has sublet all of its 284,704 square feet (26,450 m2) of accommodation at 30 Churchill Place to WeWork.

WeWork will take a new sublease from EMA for a term to the expiry of EMA’s lease in June 2039. WeWork is commencing the fitting out and is looking to open in December 2019. EMA relocated to Amsterdam in March 2019 as a consequence of the outcome of the UK‘s referendum on its EU membership. The lease on its Canary Wharf premises runs until 2039 and does not contain a break clause, but the premises can be sublet or assigned subject to the landlord’s consent. As a result of EMA’s deal with Canary Wharf, the original High Court decision will therefore still stand.

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