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Brexit Not Sufficient Grounds to Break a London Office Lease

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A London judge in February 2019 ruled that a European Union agency, the European Medicines Agency (EMA), could not use Brexit to break its lease.

The EMA is moving its 900-people headquarters to Amsterdam, The Netherlands as a direct result of Brexit. It has a 25-year lease for 10 floors in a building in London’s Eastern financial district, Canary Wharf, with 21 years to run. The European agency pays about EUR 15 million a year in rent.

The case is one of the first in the UK to deal with the commercial ramifications of Brexit. Had the EMA won its case, it would potentially have opened the door to other organizations using Brexit to attempt to end their leases on office space in the UK.

The case is all the more significant in that it deals with a situation where the tenant is under an absolute obligation to leave as a direct result of Brexit, i.e. British referendum; laws passed as a result of the referendum; and government decisions. A private tenant is not obligated to do business in Continental Europe post-Brexit and therefore is in a position to decide to keep a lease in the UK as-is; their case would have been a tad weaker that the European agency’s. It is now rather likely that commercial tenants whishing to break their UK lease will lose in UK courts.

The ruling is both bad news and good news for the insurance industry. For owners of real estate in the UK, it is good news; but bad news for renters of office space who are in the process of relocating teams to the Continent. Life insurers tend to have large real estate portfolios; several insurance groups – especially from the U.S. and Japan – are now moving their E.U. operations out of London.

The court decision also affirms the preeminence of the letter of commercial contracts even in the face of exceptional circumstances. Subject to further legal analysis and commentary, parts of the decision perhaps may be used to enforce the continuation of existing contracts between UK and EU-based entities, such as insurance distribution agreements, TPA service arrangements, assistance policies, and more.

We may hear more about the EMA case in the near future. The EU’s reaction may well be, why should European taxpayers pay over EUR 300 million for office space they had to vacate due to British people’s fiat? Wouldn’t it be fair to put the burden on the British taxpayer instead, for example by transferring the lease to the UK government?

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