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I recently published commentary on the Canary Wharf (BP4) T1 Limited and others v European Medicines Agency matter due to the potential impact the decision of which would have for commercial landlords in the UK. The High Court has now issued its judgement.
By way of recap on the background as to why the matter came to the High Court, the medicines regulator European Medicines Agency (“EMA”), entered into a 25-year lease with Canary Wharf T1 Ltd (“the Landlord”) for ten floors of office space in a building in Canary Wharf for a term commencing from 2014. The EMA is now moving from Canary Wharf to Amsterdam, due to the proposed withdrawal of the UK from the EU, in order to be sited within a member state. It argued that Britain’s decision to leave the European Union was an unforeseen event and as such it should be able to exit its lease under the doctrine of “frustration”. Frustration is where a contractual agreement may be set aside when something occurs after the formation of the same making it physically or commercially impossible to fulfil, or transforms the obligation to perform into a substantially different obligation from that undertaken at the moment of entering into the contractual agreement. This doctrine rarely applies in the cases of leases.
The Court found in favour of the Landlord. It accepted that EMA would suffer unexpected financial hardship as a result of Brexit and its decision to relocate out of London was caused by events outside of its control. EMA, however, as tenant had made a conscious choice to enter into a long-term relationship with long-term obligations towards the Landlord. The Court believed EMA could have insisted on protections being inserted within the lease, for example, by negotiating a break clause as a trade off for paying a higher rent. It chose however to accept the incentives offered by the Landlord during commercial negotiations and must honour the terms of the lease. The Court looked at the implications on the Canary Wharf area should EMA forfeit its lease. It was deemed that the loss of such a huge tenant like EMA would have commercial ramifications for the Canary Wharf area that far outweighed the financial reasons for the EMA to ending their lease prematurely.
If the Court had found that Brexit was deemed a frustrating event, and that EMA could terminate the lease on that basis, it would have set a precedent for other tenants trying to use any unforeseen event (not only just Brexit) as a means of terminating their lease arrangements. This particular case was decided on the individual facts involved and the lease terms agreed by EMA which the Court felt it had to live with. The fact that Brexit will not be automatically deemed a “frustrating event” should provide greater certainty in all commercial contracts, not just leases.
EMA will be able to rely on its rights of assignment and underletting to dispose of its interest and to facilitate its relocation to Amsterdam.
When taking a new lease, tenants need to focus on forward planning, taking into account even the most unlikely of events. Whether the landlord will be of the same view is quite another matter. Tenants should seek to obtain as much flexibility as possible on alienation and break clauses. This will normally, however, come at a “cost”.
This article has been produced for general information purposes and further advice should be sought from a professional advisor.