Imagine the situation where your tenants could claim that the momentous situation arising from exiting the EU could be cause to walk away from their lease. A recent case has shown this not to be complete fantasy, although for landlords the good news is that this is not a valid reason to discharge a lease.
The European Medicines Agency governs EU regulations on medical products and as an EU institution is required to operate from within the European Union. The EMA took a 25 year lease on a building in Canary Wharf in 2011 as its headquarters. The lease had no break clause but did contain rights to assign or sub-let. Following the EU referendum in 2016 the EMA decided to relocate its headquarters to Amsterdam. The Canary Wharf Group (CWG) sought a declaration from the High Court that Brexit would not discharge the EMA’s lease of their headquarters by virtue of frustration. EMA sought a declaration that Brexit would frustrate their lease.
Legal doctrine of frustration
According to the doctrine of frustration a contract can be discharged if something happens, after the contract has started, which makes it impossible to fulfil the contract or makes the obligation under the contract completely different to the one entered into at the outset.
As the first case to centre around the implications of Brexit for property disputes (and potentially other contractual disputes) this was an important decision.
The High Court decided that the lease will not be frustrated (and therefore discharged) when the UK leaves the EU. The Court accepted that the EMA will suffer financial hardship but said that the EMA had entered into a long lease without a break clause as this was financially advantageous to them at the time. The lease had been carefully drafted to protect CWG – EMA are a cornerstone tenant whose rent is critical to CWG cash flow. Frustration of the lease would cause considerable commercial damage to CWG in an entirely unexpected manner.
As ever, the case was decided on its own facts, but the property world can breathe a collective sigh of relief that the Court did not find that tenants are able to walk away from their lease because of the wider impacts brought about by Brexit.