Break Notices – should the Quarter's rent be apportioned?

Supreme Court finds for Landlord

In Marks and Spencer Plc (M&S) v BNP Paribas Securities Services Trust Company (Jersey) Limited (BNP) [2015] UKSC 72 the Supreme Court considered whether, upon termination of the lease under a break clause, there should be implied a term that a tenant who makes a quarterly rent payment in advance is entitled to repayment for rent attributable to the period after the break date.

The Supreme Court unanimously held (02.12.15) that such a term should not be implied and that rent paid in advance can be retained by the landlord save in very exceptional circumstances.

The issue

The Apportionment Act 1870 provides that all rents shall be treated as accruing from day to day and so where rent is paid in arrears it should be apportioned up to the lease expiry date. However, the Act does not apply to rents payable in advance. In such cases the answer will depend upon the construction of the lease.

In the case of break clauses, they will usually be conditional upon payment being made, before or on the break date, of the principle rent and, in some cases, insurance, service charge, etc.

If rent is payable quarterly in advance, and the break date falls between the quarter days, the question frequently faced by tenants is whether to pay the quarter's rent in full and subsequently seek reimbursement of the balance from the break date to the end of the quarter?

Facts of M&S v BNP

M&S occupied premises pursuant to four leases each of which ran until February 2018. A "Basic Rent" of £919,800.00 per annum plus VAT was payable "yearly and proportionately for any part of a year by equal quarterly instalments in advance on the Quarter Days". M&S was also liable to pay a car park licence fee, insurance costs and a service charge.

In July 2011 M&S gave notice to terminate the leases on 24 January 2012. M&S paid the full quarters' Basic Rent from 25 December 2011 to 24 March 2012 together with the service charge and licence fee for that quarter plus insurance from July 2011 to June 2012. On 18 January 2012 M&S then also paid the Break Premium (which was equivalent to 1 year's Basic Rent).

The leases terminated on 24 January 2012 and M&S subsequently issued proceedings to recover rent and service charge (of approximately £1.147m) which it claimed it had overpaid for the period from the Break Date to the end of the quarter.

Even though it found that there was no provision in the lease which enabled M&S to recover the apportioned element, the High Court implied a term to this effect. It found that M&S should be in the same position as if it had paid the Break Premium on or before 25 December 2011 as, if it had done so, both parties accepted that it would have been certain that the break would have taken effect on 24 January 2012 such that the rent could be apportioned. Also the High Court found that the payment of the Break Premium compensated the landlord for any such loss of rent.

BNP appealed in relation to the Basic Rent, insurance charges and car park fees but did not dispute M&S' right to repayment of service charge for services which had not been provided by BNP by the break date.

BNP's appeal was successful in the Court of Appeal.

The Court of Appeal agreed with the High Court's decision that the words "proportionately for any part of a year" did not amount to an express provision to provide for an apportionment of the Break Premium. However, the Court of Appeal did not agree that a term should be implied to this effect. Instead Lady Justice Arden, delivering the leading judgment, followed the conclusion of Lord Hoffmann in General of Belize –v- Belize Telecom Ltd [2009] UKPC10 the starting point being that, if there is no express term in the lease then none should be implied because if the parties had intended for a particular term to apply then they would have included that in the drafting.

Interestingly, Lady Justice Arden commented that "without deciding the point", M&S could have made a proportionate payment of rent on 25 December 2015 if by that date they had paid the Break Premium (ie paid it before 25 December 2012). She concluded that that would "seem to be correct" although the point was not fully argued before the Court of Appeal.

In conclusion, the Court of Appeal held that "the loss from a payment of rent for the broken period should lie where it fell" and that no term for repayment to M&S would be implied.

In its unanimous judgment the Supreme Court (Lord Neuberger- President, Lord Clarke, Lord Sumption, Lord Carnwath and Lord Hodge) found against M&S. Lord Neuberger - President of the Supreme Court, delivered the leading judgment:

  • The Court followed the Court of Appeal's finding in Ellis v Rowbotham [1900] 1 QB 740 that the Apportionment Act 1870 does not apply to rent payable in advance
  • A term would not be implied that the rent paid from the break date to the end of the quarter would be reimbursed: 

"Given that it is so clear that the effect of the caselaw is that rent payable and paid in advance can be retained by the landlord, save in very exceptional circumstances… express words would be needed before it would be right to imply a term to the contrary"

 "Save in a very clear case indeed, it would be wrong to attribute to a landlord and a tenant, particularly when they have entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent has been so long and clearly established"

  • As regards the potential anomaly that in this case M&S could have paid only up to 24th January 2012 if they had paid the Break Premium before 25 December 2011, the Court found:

"… while the difference in the result between the tenant paying the £919,800 plus VAT before or after 25 December 2011 can fairly be said to be capricious or anomalous, it does not begin to justify a suggestion that the contract is unworkable. Indeed, the result cannot be said to be commercially or otherwise absurd, particularly as it is entirely up to the tenant as to when that sum is paid."   

Conclusion

When considering the exercise of a break clause falling between quarter days, the general approach will be:

  • Is there a specific provision in the lease dealing with apportionment in relation to the break clause? If not,
  • The Tenant is likely to have to pay the full rent up to the end of the quarter and then debate with the Landlord as to whether or not there should be a reimbursement of part

It goes without saying that each case turns on its own facts and should be given careful consideration on a case by case basis.