Frustration for Landlords as the Brexit Uncertainty Continues

September 27, 2018

In the contentious matter of Canary Wharf (BP4) T1 Limited and others v European Medicines, an on-going court battle ensues involving a tenant trying to vacate a lease of premises in Canary Wharf, London due to the implications of Brexit.

The medicines regulator, European Medicines Agency (“the 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 after Brexit. They argue that Britain’s decision to leave the European Union was an unforeseen event and as such they should be able to exit the lease under the doctrine of “frustration” (where a contractual agreement may be set aside when something occurs after the formation of that contractual agreement rendering it physically or commercially impossible to fulfil the contractual agreement, or transforms the obligation to perform into a substantially different obligation from that undertaken at the moment of entering into the contractual agreement).

The Canary Wharf Group (“the CWG”) developed the premises and as expected disputes the claim from EMA that the lease has been frustrated. They argue that Brexit was foreseeable by virtue of the existence of Article 50 of the Treaty of the European Union (which states that any member state may decide to withdraw from the European Union). The rental income from EMA is vital for CWG’s repayment to lenders who helped fund the development of the premises. The amount currently owed to lenders sits at £500 million and it is argued that this should be paid if EMA walk away from their lease early. The lawyers acting for CWG and the Landlord have warned that a ruling in favour of the EMA could allow other institutions (or commercial tenants in general) to abandon other leases after Brexit, especially those within the Canary Wharf area, posing a significant threat to the British property industry.

A ruling in favour of the EMA could mean the lease coming to an early end without them having to fulfil its obligations under the lease any further, such obligations including the payment of rent and property rates. Worryingly for landlords this may set a dangerous precedent and allow tenants to use Brexit as a reason to walk away from a lease they would otherwise not have been able to walk away from before the term of the lease came to an end. What’s to stop Brexit from frustrating contractual arrangements other than leases? A ruling in favour of EMA may open the floodgates to allow for commercial arrangements to be set aside which may be catastrophic for not only the property market in the UK but its economy in general.

Many landlords, and parties to contractual agreements, will be watching with bated breath to see how this dispute plays out in the courts.

This article has been produced for general information purposes and further advice should be sought from a professional advisor.

Shane Conlan, Solicitor, Property Team, Cleaver Fulton Rankin, Solicitors.