Whilst no comment is made on the emotional significance of Brexit, landlords have breathed a sigh of relief at the news that this event will not frustrate the European Medicines Agency's (EMA) lease of a building in Canary Wharf.
What was in dispute?
The EMA contended on a number of grounds that its 25 year lease, granted in October 2014 (the Lease), would be frustrated by the potential withdrawal of the United Kingdom (UK) from the European Union (EU). Those grounds ranged from loss of European Treaty protection, legal incapacity to make use of the premises, inability to perform the lease obligations (in particular, pay rent) and the potential need to pay rent on both the Canary Wharf premises and the new HQ premises in Amsterdam.
It is rare that frustration is pleaded before the Courts, especially as the tendency is to restrict the application of the doctrine in the interests of contractual certainty. Frustration has been held to occur "whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract". Davis Contractors Ltd v Fareham UDC (1956)
It was a key contention that Brexit could not have been reasonably contemplated by the parties when the Lease was signed and that, as a consequence, it would be unjust to hold EMA to the lease terms.
What was decided?
In delivering judgment, Marcus Smith J was unequivocal that:
"the Lease will not be frustrated on the withdrawal of the United Kingdom from the European Union. This is neither a case of frustration by supervening illegality nor one of frustration of common purpose. The Lease will not be discharged by frustration on the United Kingdom’s transition from Member State of the European Union to third country nor does the EMA’s shift of headquarters from London to Amsterdam constitute a frustrating event. The EMA remains obliged to perform its obligations under the Lease."
What is the significance of this decision?
There had been concern that, despite the niche facts in relation to this case involving a EU Agency, had the judgment gone the other way, the floodgates would have been opened for contracts across both the property industry and wider business community to be potentially vulnerable to Brexit frustration claims. This decision provides certainty for the market.
Was Brexit a reasonably foreseeable event when the Agreement for Lease was signed in August 2011?
Marcus Smith J said that it wasn't.
This may prove persuasive in relation to other cases where parties to contracts concluded prior to that date can actually show a common purpose to their contract that specifically depended on the UK remaining within the EU.
The EMA was not able to show sufficient common purpose that the lease was to "provide a permanent headquarters for the EMA for the next 25 years and that if that could not be achieved, the common purpose of the Lease had failed". Key to this finding was the length of term of the Lease, the absence of a break clause and the ability to assign and underlet the premises. Marcus Smith J felt that "the EMA assumed the risk of change over a 25 year period" and that it "was foreseeable that over this long period of time, there might be some development that would require the EMA involuntarily to have to leave the Premises due to circumstances beyond its control….the parties appear to have catered for this possibility in the Lease: the Lease contemplated the EMA would be committed to the Premises subject only to the alienation provisions".
Impact of a Legal Opinion Letter
As is usual in scenarios where a foreign entity enters into a contract in relation to UK property, a Legal Opinion Letter was provided confirming that the EMA "had the power and legal capacity to enter into [the Proposed Lease]…..to choose English law as the governing law for the [Proposed Lease] and...to submit to the jurisdiction of the English Courts and to observe and perform all its obligations under and the conditions of...the Proposed Lease".
Marcus Smith J said that whilst he did not derive very much from the opinion letter, it did go towards showing that the parties had contemplated the allocation of risk in the documents (as discussed above) and that the letter gave the landlord comfort on the ability of the EMA to perform a long term contract. It will probably not previously have been thought that the procedurally-standard issue of a Legal Opinion Letter would constitute evidence as to what the parties were contemplating at the time of entering into the transaction, but it seems it might?
The judgment is nearly 100 pages long and it will take time for the ramifications it has on EU and International law points to become clear.
The EMA has already indicated that it will be carefully studying the judgment, its implications and "the most appropriate way forward". It has suggested that a preliminary reference to the Court of Justice of the European Union would be appropriate, so watch this space for any appeal.