In a painstaking judgment handed down yesterday morning, Marcus Smith J held that in the event that the United Kingdom does leave the European Union, as it is set to do on 29 March, this action does not operate to frustrate a lease entered into by the European Medicines Agency (EMA).
The EMA is an agency of the European Union, and holds a 25-year lease in Canary Wharf, which was granted in 2014. After the referendum in June 2016, the EMA decided that, under European law, it had to move its headquarters to a location still within the European Union. It found alternative premises in Holland, and sought a declaration from the court that it would be relieved of its tenancy obligations under the doctrine of frustration.
The doctrine of frustration, where contracts can be set aside if an unforeseen event either renders contractual obligations impossible, or radically changes a party’s principal purpose for entering into the contract, can apply in relation to leases. Case law, however, suggests that only something as extreme as the physical destruction of the subject matter of the lease will do. The courts have given examples, such as the upper floors of a block of flats being destroyed or the loss of a building to the sea.
A central plank of the EMA’s case was that, under European law, it was not allowed to sublet its premises. The judge rejected this argument for reasons that are beyond the scope of this blog, and concluded that subletting was not outside its powers. However, he then went on to hold that in any event the situation was not so unexpected that the lease could be held to have been frustrated. Indeed, he pointed out that the landlord had made elaborate provision in the lease to protect its position should the EMA wish to assign or sublet its lease.
This ruling will be a relief for landlords, who otherwise feared that any tenant badly affected by Brexit would be able to argue that their lease was frustrated. However, this is unlikely to be the end of the matter for the EMA given its particular circumstances. It remains to be seen whether the EMA will apply to the European Court of Justice for a declaration under European law on the EMA’s power to sublet, or whether it will seek leave to appeal to a higher court. However, the scope of the doctrine of frustration is unlikely to be extended to cover substantial political events, such as Brexit.