Brexit just isn't exceptional enough...

No doubt, elements of the property industry are celebrating in the wake of Mr Justice Smith's landmark ruling last week, in which he concluded that Brexit was not an exceptional enough circumstance to frustrate a lease.

In October 2014, the European Medicines Agency (the "EMA") took a lease of premises in Canary Wharf and set up its head quarters.  The lease was for a term of 25 years, at an annual rent of £13m, but contained no break provisions to enable the EMA to terminate the lease before its expiry in 2039.

Following the UK's decision to leave the EU, the EMA attempted to use the legal doctrine of frustration to end its lease.  The doctrine of frustration can be relied upon in exceptional circumstances when something occurs after the formation of a contract which renders the contract physically or commercially impossible to fulfil, or transforms the obligations under the contract into radically different obligations from that undertaken when the contract was entered into.

As the EMA required their headquarters to be in an EU member state, they argued that Brexit had frustrated the lease and it should be brought to an end.

Undoubtedly, landlords everywhere breathed a sigh of relief when the judge concluded that the EMA could not simply walk away from its contractual obligations under the lease.  He acknowledged that the EU might not wish to have the headquarters of one of its agencies in a non-EU country, but there was no legal reason why they couldn't.  

When the agreement for lease was entered into in 2011, the parties had agreed the steps that should be taken if the EMA wanted to vacate the premises during the term.  These included options such as assigning the lease or subletting the whole of the premises.  The judge therefore held that the parties should remain bound by this agreement (given that the EMA can assign or sublet) and that Brexit did not create circumstances exceptional enough to trigger frustration.

The judge's decision in this case gives greater certainty as to the impact of Brexit on commercial contracts.  Landlords can rest easy in the knowledge that the floodgates have not been opened to  tenants hoping to walk away from the obligations under their leases, citing Brexit as the frustrating event that permits it.  It is certainly a positive outcome for the London property market (and the economy generally), that might otherwise have suffered an influx of vacant premises.

The EMA have until 29 March to appeal the court's decision and, given the £13m annual rent liability, it is considered likely that the EMA will make the most of this opportunity.  It is something to watch...