Brexit: Grounds for lease frustration?

Samantha Jones, an Associate Director at Prop-Search

The impact of Brexit upon property has not been wide ranging thus far says commercial property agent Prop-Search.  However, a case which is set for trial in the early part of 2019 may alter that position and potentially have a bearing on property contracts.

The defendant tenant, European Medicines Agency (EMA), is a medicines regulator responsible for authorising and monitoring medicines in the EU.  It is heavily regulated and controlled by EU entities and its staff EU civil servants.  It is arguing that Britain’s decision to invoke Article 50 operates to frustrate a 25 year lease it entered into in 2014 - on 10 floors of office accommodation in Canary Wharf, London - which would allow the lease to be terminated.  Following the UK’s decision to exit the EU, the EMA has decided to relocate its offices to Amsterdam.

The claimant landlord, Canary Wharf Group (CWG), disagrees and to avoid uncertainly commenced proceedings seeking a declaration from the Court that the lease with EMA is not frustrated by Brexit.

Samantha Jones, an Associate Director of Prop-Search, says: “Frustration is a legal doctrine which renders a contract incapable of being performed due to an unforeseen event - after the contract has been entered into - resulting in the obligations under the contract being radically different from those that were contemplated by the parties.  Frustration ends the contract with immediate effect.”

The EMA argues that Brexit was an unforeseeable event which, because of the extent to which it is intertwined with EU institutions and member states, frustrates the lease.  CWG asserts that Brexit was a foreseeable event due to the existence of the Article 50 and David Cameron’s promise in 2013 of an in/out referendum if the Conservatives won the 2015 General.  And furthermore, that the lease does contain a provision to sub-let the office space which would allow the EMA to relocate.

Samantha Jones adds: “It is easy to see why the EMA would want to argue that the lease has been frustrated.  If its argument is accepted, it gets to walk away from its lease and move to Amsterdam with no liability to the landlord for future rent or rates.  Equally, CWG will be keen to keep the EMA on the hook for the remaining 20 years of the lease - estimated to be worth in the region of £500m in rent.

Whilst a ruling in favour of the tenant could set a dangerous precedent, Prop-Search believes it is unlikely that other tenants will be quite so entrenched with EU institutions and as such the event of Brexit would not be such an arguable frustrating event.