A Case Note on: Marks and Spencer Plc v  BNP Paribas Securities Services Trust Company Limited [2015] UKSC 72

Introduction

The Supreme Court decision in the Marks and Spencer case was published on 2 December 2015.  It concerned the following question: when a tenant exercises a break clause which terminates the lease during a quarter, will the court imply a term requiring the landlord to refund the proportion of rent paid in advance for the remaining unused period of the quarter? That was the question which the parties wanted to know the answer to, but the Supreme Court had to tackle some underlying questions about the interpretation of contracts and implied terms in order to reach the answer.  The resulting decision is important for the law of commercial leases, but will also have a wide-ranging impact beyond the law of landlord and tenant.

The Result in a Nutshell

There is a long-established common law rule against apportioning rent payable in advance and this was a detailed lease drafted by expert lawyers with substantial commercial clients.  That formed the background in which the parties negotiated this lease.  The court should not imply a term in those circumstances, even if the result leads to an unfair windfall for the landlord.  The Supreme Court severely tightened up the rules on implied terms in leases (and in contracts generally) and put a halt to any suggestion that terms could be implied when they are reasonable as part of the general task of interpreting the document.

Wide Commercial Impact

Lawyers are frequently asked to advise clients on the likely interpretation and enforcement of documents – especially in property and chancery cases.  In particular, what will the court decide is the meaning of a disputed clause?  Can a term be implied?  How will the court apply the provisions of a document to the facts of the case?  Commercial clients understandably want to know, with as much certainty as possible, that the carefully drafted words of leases and other contracts will be given full effect by the courts, otherwise business can be impossible.  On the other hand, they occasionally need to be relieved from a harsh bargain which they (or their advisers) had not anticipated in advance

There is therefore a tension between:

  1. the need for flexibility in the interpretation of documents, so that an unfair, unexpected or even absurd result can be avoided; and
  2. the need for certainty and predictability, so that parties can rely on advice with some faith in the likely outcome in the event of a dispute.

It is impossible to achieve both, but the correct balance between the two is very difficult to achieve.  Over the last few decades, the pendulum had swung in favour of flexibility, principally under the influence of Lord Hoffmann[1].  But now, with the Supreme Court under the leadership of Lord Neuberger, the pendulum is swinging gently in the other direction, in favour of closer adherence to the words of the document and arguably therefore greater certainty[2], but often at the expense of a fair result.  Lord Neuberger is known to prefer to give greater weight to the words the parties chose to use in their documents, at least as a firm starting point.  This should have a profound effect on how we all look at the meaning of documents.

The Facts of the Case

The Marks and Spencer case takes this process further.  In the case, the tenant of the third floor of The Point in Paddington Basin, London W2 had served a break notice (on six months’ notice within the terms of the lease) terminating the lease early on 24 January 2012, one of two possible fixed break dates provided by the lease.  Another requirement of the break clause was that the tenant should pay £919,800 plus VAT on 18 January 2012, effectively as a premium for exercising the break clause.  On 25 December 2011, the tenant had paid (as required under the lease) the full quarter’s rent of £309,172.25 plus VAT in respect of the rent up to 24 March 2012.   The tenant claimed a refund of the proportion of rent attributable to the unused period between 24 January 2012 and 25 March 2012 on the basis of an implied term that if the lease was terminated on 24 January 2012, then the landlord would repay that proportion.  Morgan J at first instance gave judgment for the tenant.  The Court of Appeal overturned that judgment and the tenant appealed to the Supreme Court.

The case presented a stark choice.  The lease did not provide expressly for an apportionment of rent on the exercise of the break clause, but the retention by the landlord of about £200,000 rent for a period after the termination of the lease (with no default by the tenant) is a windfall which is not commercially justifiable. 

The Law of Implied Terms

The tenant sought the implied terms on the grounds of business efficacy.  This is sometimes framed as the “Oh, of course!” test: “so obvious that it goes without saying”[3].  In the Marks & Spencer case, Lord Neuberger (at para 21) offered six important comments on the business efficacy / obviousness test:

  1. When asking what the parties would have agreed, one is concerned with the hypothetical answer of notional reasonable people (not the actual parties) in the position of the parties at the time
  2. A term will not be implied merely because it appears fair, or merely because the parties would have agreed it if it had been suggested to them.
  3. A requirement for the term to be reasonable and equitable probably adds nothing, because that would be satisfied by the other parts of the test.
  4. Business necessity and the obviousness test can be alternatives.  They do not both need to be satisfied.
  5. The question to the “officious bystander” needs to be formulated with the utmost care.
  6. Business efficacy involves a value judgment.  A helpful way to put the question is: without the term, would the contract lack commercial or practical coherence?

Lord Neuberger also entered into a detailed evaluation of Lord Hoffman’s analysis of implied terms in the Privy Council case of Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988In that case, Lord Hoffman had reduced the test for an implied term to the question: “is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?” and suggested that implying terms was just part of the process of interpreting the contract.  Lord Neuberger in Marks & Spencer felt it necessary to add two major provisos to Lord Hoffman’s formulation to avoid the suggestion that reasonableness by itself is a sufficient ground for implying a term.  He stipulated (1) that obviousness and/or business efficacy was still an absolute requirement and (2) that the test is to be applied as at the time the contract was made.

He was apparently alarmed that judges and academics had regarded Belize Telecom as having changed the law.  He was also concerned to restore the difference between (a) interpreting contracts and (b) implying terms – a difference which had been blurred by Lord Hoffman and others.  Lord Neuberger insisted that it is necessary to interpret the contract first to determine what the words mean in their context, and only then to see whether it is necessary to imply a term.

Lord Neuberger finished his evaluation of Belize Telecom with the wonderfully tactful direction for us to treat Lord Hoffman’s words “as a characteristically inspired discussion rather than authoritative guidance on the law of implied terms”.

The Decision on the Case

The Supreme Court in Marks & Spencer noted that the retention of the full quarter’s rent would involve an unfair windfall to the landlord.  Reimbursement would be reasonable and equitable. There was also an inherent inconsistency with the position if the lease had expired at the end of the full term, in which case there would have been a proportional rebate on the rent to reflect the mid-quarter expiry.  All these were powerful arguments that the implied term, for a proportional refund upon exercise of the break clause, was justified by business efficacy.  But the Supreme Court was more persuaded by the countervailing arguments, including the point that that the parties were substantial and experienced commercial entities who had agreed a very detailed document advised by expert solicitors. 

But the issue which seemed to tip the balance was the fact that it is long-established at common law that rent is not apportionable in time.[4]  The parties knew about the long-established rule against apportionment and that the lease was negotiated against that background.  This seems to have been the deciding factor.  No matter how unfair the rule was or how it operated inconsistently with other provisions of this lease, Lord Neuberger concluded that “Given that it is so clear that the effect of the case-law is that rent payable and paid in advance can be retained by the landlord, save in very exceptional circumstances (eg where the contract could not work or would lead to an absurdity) express words would be needed before it would be right to imply a term to the contrary.” (see para 50).

Lord Carnwath and Lord Clarke attempted to water down the criticism of Lord Hoffman’s approach in Belize Telecom, but the majority of the Supreme Court in Marks & Spencer agreed with Lord Neuberger.

Conclusion

So the Marks & Spencer case really puts the brakes on the forward drive towards flexible interpretation of leases and other contracts and to some extent throws the process into reverse gear.  The majority of the Supreme Court under Lord Neuberger holds the parties to the words of the document they have signed, and will only imply further words if (a) they are so obvious as not to have needed spelling out or (b) without them the lease or contract would lack commercial or practical coherence.  This is to be measured from the point of view of a notional reasonable bystander with the parties knowledge at the time of the signing, not the parties themselves.  And reasonableness or fairness is not a good reason to imply a term.  Finally, implying a term is not part of the general process of interpreting documents; it is to be done only after the document has been fully interpreted.

Lord Neuberger has sent out a clear warning that the courts will no longer be so willing to save the parties (or their advisers) from drafting they later come to regret.  It is a welcome decision from the point of view of those who would like to advise their clients with some certainty about the true meaning of a document, but it is likely to put much more pressure on those who draft documents … and their indemnity insurers.