Court to hear evidence before ruling on Canary Wharf's Brexit-linked lease clash
The court case that will determine whether the European Medical Agency (EMA) can escape its 25-year, £500m (€562m) London office lease due to Brexit will include evidence, a judge has decided.
The case has implications for the UK office market, which if found in favour of the EMA, could set a precedent for other companies looking to release themselves from tenancies due to the UK’s departure from the EU.
On 29 June, Canary Wharf Group (CWG), which owns a large development in east London, asked the High Court of England and Wales to issue a declaration that Brexit was not a ’cause for frustration’ of the EMA’s rental contract for its current 10-floor premises at 25-30 Churchill Place.
The agency, which is moving to Amsterdam when the UK is set to leave the EU on 29 March 2019, has said the lease, which was signed in 2011, will need to be terminated early.
Under the terms of the contract, which runs until the end of June 2039, the EMA is still liable to pay a further £489m in rent and other costs.
IPE Real Assets has learned that, during a pre-trial hearing on Wednesday, a judge decided that the case would not be heard not under the simpler ‘Part 7’ Civil Procedure Rules (CPR) but rathera hybrid process that would allow factual evidence to be given.
The trial has been set for sometime in January.
Sarah Walker, associate in the commercial disputes and regulation team at law firm Shepherd and Wedderburn — which is unconnected to the case — told IPE Real Assets that it had been historically extremely rare for an English court to find that a lease had been frustrated.
“The doctrine is narrow in its scope and the courts have been consistent in their message that the doctrine should not be widened,” she said.
“Having said that, litigation can be unpredictable and the concept of Brexit being a cause of frustration is a new and novel argument before the court so nothing is certain.”
If the EMA did win, Walker said, it was likely many more tenants would try to escape their leases on the basis of frustration due to the impact of Brexit.
“This could pose a significant threat to the UK’s property industry,” she said.
In its 2017 annual report, the EMA said that, “the early termination of the lease is the consequence of events for which the agency is not responsible, which were unforeseen at the time the lease was signed”.
As a result, it said, it could not ultimately be financially impacted by such events.
The lease contains no early termination clause but does allow subleasing.
A spokesperson for the agency told IPE Real Assets: “As a consequence of the Brexit vote in the UK, no EU decentralised agency will be able to operate from the territory in the UK, which will become a third country.”
The spokesperson said this meant the EMA and the European Banking Authority (EBA) would have to vacate their current premises in Canary Wharf on 29 March next year.
She said the EU’s General Affairs Council did not decide on 20 November 2017 if the EMA and EBA should move, but only where they would move due to Brexit.
“EMA’s relocation to Amsterdam is therefore not an economically-motivated move but needs to be seen in a wider context governed by EU law,” she said.
“EMA is still pursuing all possible options in accordance with the lease agreement and trusts that the remaining time will be used to find a solution acceptable to all parties.”
George Iacobescu, CWG’s chairman and chief executive, said in his first witness statement in his company’s court claim of 7 June that the EMA claimed the lease would be brought to an end at Brexit by virtue of the legal doctrine of frustration.
He said the commercial consequences for CWG of the EMA’s arguments being correct were very substantial.
He said: “The security of the income stream from the lease over the 25-year period was the key factor in CWG’s ability to raise £384m of finance and the reason why the landlords were able to offer the EMA such a substantial package of inducements and rent-rent-free periods.”