Real Estate Tip of the Week: Lease Frustration

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Real Estate Tip of the Week: Lease Frustration

Published 3 June 2019

The European Medicines Agency (EMA) entered into a 25 year lease of commercial premises in October 2014.

In 2017, following the UK’s notification to the EU of its intention to withdraw, the EU ordered the EMA to relocate its headquarters so that it would remain within a member state.

On receipt of correspondence from EMA stating that it would treat Brexit as a frustration of the lease, the landlord brought proceedings against EMA seeking a declaration that the lease would not be frustrated by the UK’s withdrawal from the EU.

In a legal context, frustration arises where something occurs, without the fault of either party after a contract has been entered into, which renders it commercially or physically impossible to fulfil the contract. Given that the effect of frustration is to release the parties from the further performance of their contractual obligations, it has tended to be construed very narrowly by the courts.

EMA’s major argument was that the UK’s departure from the EU would result in it becoming unlawful for EMA to continue to pay rent to the landlord and perform the tenant’s covenants in the lease because, in doing so, it would be acting without capacity.

The Court rejected this argument and concluded that, despite Brexit, EMA retained capacity to deal with property outside the EU and to pay rent or assign or sublet pursuant to the terms of the lease. In addition, there was nothing in EU law which prevented the EU from maintaining the headquarters of its agencies in non-EU countries (although it was recognised that there were good practical reasons why the EU would choose not to do so). The Court held that the lease would not be discharged by frustration as a result of Brexit. The lease will therefore remain in force and EMA will be required to continue to perform its obligations for the rest of the term, with an estimated total rental liability of £500 million.

The High Court has recently granted EMA permission to appeal against its decision to the Court of Appeal, conditional on EMA performing its obligations pending the appeal. The outcome of this appeal will be of great interest, given its potential far-reaching consequences for property and construction contracts.

Authors

George Taylor

George Taylor

Manchester

+44 (0)161 934 3703

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