Teresa Edmund and Sukanya Majumdar
On 20 February 2019 the High Court ruled against the European Medicines Agency (EMA) in a case brought by its UK landlord, Canary Wharf Group (CWG), which considered whether the UK’s withdrawal from the EU enabled the EMA to treat its lease as at an end.
The EMA is the arm of the European Union (EU) responsible for the evaluation, authorisation and monitoring of medicines across the single market. It has been based in London since it was set up in 1995 and, in 2014, it entered into a 25-year lease of a new building at 25-30 Churchill Place at a starting rent of £13m pa. The lease was entered into pursuant to an agreement concluded in 2011 which enabled EMA to input significantly into the building’s design.
Following the UK’s vote to leave the EU, the EU prescribed* that the EMA should be headquartered in Amsterdam but, unlike the European Banking Authority (which is relocating post-Brexit), the EMA does not have the benefit of a break right in its lease. To avoid paying rent in London until 2039 despite not occupying its offices here, the EMA sought to argue that its lease will be frustrated by Brexit. In addition, it proposed a self-standing argument that by virtue of EU law the EMA had no power to discharge its future obligations under the lease and, as such, the UK is required to provide a remedy for it, even if outside the doctrine of frustration.
Frustration is an exception to the general rule that contracts are an absolute and binding commitment between the parties and can only arise where an event occurs after the contract has been entered into which makes the contract either impossible of performance or radically changes the nature of the obligations under it.
The EMA argued that it could not operate its EU regulatory role from a non-EU country, and being tied to its lease in the UK would push it beyond powers conferred on it as an EU regulatory body, making discharge of its contractual obligations illegal. The court found that the EMA had proper capacity to enter into the lease in 2014 when it acquired the property, and, regardless of Brexit, there was no doubt that the EMA will continue to have capacity to deal with property which it already holds, even if it is located in a non-EU country. The EMA’s argument that the lease will be frustrated as a result of a supervening illegality was therefore rejected by the Court.
The Court also rejected the EMA’s argument that the impact of Brexit significantly changes its obligations because it will lose the benefit of a number of protections against contractual liability afforded to it, particularly under Protocol 7**. The Court found that, although this protection will be subject to changes by the UK government, the protection is only diminished and not eliminated altogether. The diminished protection in relation to contractual liability will not change the EMA’s capacity to perform its contractual obligations under the lease.
The EMA also argued that both it and CWG expected the premises to be used for, and it was designed as, the EMA’s headquarters, reflected in the bespoke terms of the lease and the EMA’s substantial control over elements of design. In response, the Court emphasised that the parties had divergent commercial purposes, and found that there was no common purpose that the premises be only the EMA’s headquarters. Instead, the incorporation of alienation provisions, allowing the EMA to assign the lease, was taken as express agreement between the parties that the lease would continue even if the EMA were not occupying the premises as its headquarters. The alienation provisions, though onerous, were evidence that the EMA had agreed to this possibility, so the argument that its relocation deprived the EMA of any benefit of the lease or frustrated a common purpose was not tenable.
The Court also considered the foreseeability of Brexit at the time the agreement for lease was entered into in 2011, concluding that it was then only a theoretical possibility rather than foreseeable. Despite this, it was foreseeable to the EMA that over the long duration of the lease circumstances might arise which could require the EMA to relocate. Even if Brexit itself was not foreseeable, some change over this length of time was. Again, the alienation provisions affirmed that the EMA had accepted the possibility of such change before entering into the lease, so it could not prove that Brexit will radically change its contractual obligations.
The Court acknowledged the practical, political and economic issues at play in the case. However, it could not find any legal basis for holding that the lease will be frustrated either as a result of supervening illegality or frustration of a common purpose. The EMA’s self-standing argument was also rejected, as the court emphasised that the lease is governed by English law only and a remedy beyond frustration could not be justified for the EMA on the sole basis that it is an EU agent.
The case re-enforces judicial reluctance to apply the doctrine of frustration to contracts and leases in particular. To the relief of landlords and other contracting parties, the decision does not assist a party looking to avoid its contractual liabilities as a result of Brexit.
*Regulation (EU) 2018/1718
**Treaty on the European Union and the Treaty on the Functioning of the European Union.