In Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd (2015) the Supreme Court held that it was not appropriate to imply a term that a tenant was entitled to a refund of a proportion of rent paid in advance following the early termination of a lease. The Supreme Court considered the law relating to implied terms and emphasised the continuing strict requirements for a term to be implied into a contract, despite some academics and judges erroneously suggesting that those requirements had been relaxed following the case of Attorney-General of Belize v Belize Telecom (2009).
Marks and Spencer plc (the "Tenant") held a lease granted for a term starting on 25 January 2006 and expiring on 2 February 2018 over the third floor of a building together with the use of two car parking spaces (the "Lease"). The Lease provided that rent be paid "yearly and proportionately for any part of a year by equal quarterly instalments in advance on the [usual] quarter days". The Lease contained a break clause which provided that the Tenant could end the Lease early on 24 January 2012 (the "Break Date") by giving the Landlords six months' prior written notice. The break clause was conditional on there being no arrears of rent on the Break Date, and the Tenant paying the Landlords a penalty of an amount equal to a year's rent on or prior to the Break Date (the "Break Penalty"). The Lease did not contain an express provision entitling the Tenant to a refund of the rent for the period after the Break Date.
The Tenant served written notice on the Landlords on 7 July 2011 to exercise the break clause to determine the Lease on 24 January 2012. Shortly before 25 December 2011, the Tenant paid the Landlord the rent due in respect of the quarter from that date up to and including 24 March 2012. On 18 January 2012, the Tenant paid the Landlords the Break Penalty. The break clause had therefore been validly exercised and the Lease ended on 24 January 2012.
The Tenant claimed that they were entitled to be refunded the rent in respect of the period from 24 January, when the Lease expired, to 24 March, by virtue of an implied term to that effect. The High Court held that the Tenant was so entitled. On appeal by the Landlords, the Court of Appeal overturned the decision of the High Court. The Tenant appealed to the Supreme Court.
The Tenant argued that the Lease provided that the rent be paid "yearly and proportionately for any part of a year by equal quarterly instalments in advance" (emphasis added). If the Tenant had paid the Break Penalty before 25 December 2011, the Tenant would only have had to pay an appropriate portion of the rent, as it would have been certain that the Lease would expire on 24 January 2012. Here, however, as the Tenant did not pay the break penalty until 18 January 2012, at the time it paid the rent on 25 December 2011, it was not yet certain that the break clause would be validly exercised and that the Lease would expire on 24 January. The Tenant therefore had to pay rent for the full quarter. The Tenant argued that commercial common sense mandated that it should be in the same position whether it paid the Break Penalty before or after 25 December 2011, as it was entitled to do under the Lease.
The Landlords argued that the Lease was a very detailed document, entered into by two substantial and experienced parties, which had been negotiated and drafted by expert solicitors. The Lease made provision for a large number of contingencies. The parties had carefully and fully identified their rights against each other in relation to the break clause.
The Supreme Court unanimously dismissed the Tenant's appeal. In his leading judgment, Lord Neuberger considered that the case law on implied terms represented a "clear, consistent and principled approach". The key requirements for a term to be implied into a contract, as summarised by Lord Simon in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977), are that the term "must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it", or alternatively "it must be so obvious that 'it goes without saying'". Lord Neuberger in particular considered Attorney-General of Belize v Belize Telecom (2009), which has been interpreted in academic commentary and by judges as having changed the law on implied terms. He held that "it is necessary to emphasise that there has been no dilution of the requirements which have to be satisfied before a term will be implied".
Lord Neuberger also considered the case law on apportionability of rent. He approved the Court of Appeal case of Ellis v Rowbotham(1900) which held that rent payable in advance is not apportionable. He held that it is clear that rent payable and paid in advance can be retained in full by the landlord.
Here it was not appropriate to imply a term into the Lease that entitled the Tenant to a refund of a portion of the rent. Lord Neuberger agreed with the Tenant that there was "a powerful case for contending that it is necessary for business efficacy" to imply the term into the Lease. However, the contract was not "unworkable" without the implied term, nor "commercially or otherwise absurd". He held that in a full and professionally drafted lease, when the non-apportionability of rent in advance has been clearly established, it would be wrong to imply a term to the contrary without express wording. He therefore dismissed the Tenant's appeal.
This case provides a useful clarification of the case law on implied contractual terms. It confirms that for a term to be implied into a contract, it must be necessary for business efficacy, or alternatively, be so obvious as "to go without saying". Belize does not, as some judges and academics had thought, water down the traditional test of necessity. The Supreme Court held that Belize should not be treated as "authoritative guidance on the law of implied terms", and emphasised the "traditional, highly restrictive approach to implication of terms" found in pre-Belize case law. More widely, it is clear from this case, as in other recent cases, that the courts remain reluctant to interfere in a detailed commercial contract negotiated by two sophisticated parties.