Supreme Court confirms that a term requiring the landlord to repay rent for a period after a break date will not be implied into a lease.
The Supreme Court in M&S v BNP Paribas has firmly shut the door on tenants which have successfully operated break clauses and wish to claim back rent they have paid in respect of a period after the break date.
Landlords will be breathing an audible sigh of relief, as the Supreme Court has confirmed the Court of Appeal's decision and given certainty that, without express wording to the contrary in the lease, a tenant's claim for the apportioned rent for the remainder of the quarter is unlikely to succeed.
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Can rent ever be apportioned?
The Supreme Court was also asked to consider the 1900 case of Ellis v Rowbotham which established that the Apportionment Act 1870 did not apply to rent payable in advance. The Supreme Court upheld this decision, providing the analogy with forfeiture: a landlord who forfeits a lease under which the rent is payable in advance is entitled to the payment of the whole of the rent which fell due on the quarter day preceding the forfeiture.
Can a tenant pay only the proportionate part of the quarter's rent in advance of a break date?
Case law (such as PCE Investors Ltd v Cancer Research UK) still supports the principle that, on operation of a conditional break clause, with no wording to the contrary in the lease, a tenant which pays rent quarterly in advance needs to pay the full quarter's rent in advance of the break date.
On the facts of M&S v BNP Paribas, the tenant was to pay a penalty prior to the break date (24 January 2012). Lord Neuberger (President of the Supreme Court) said that if the penalty had been paid prior to the December quarter day, then "it would have been clear on 25 December 2011 that the Lease would end on 24 January 2012, so that the [tenant] would only have had to pay an appropriate proportion of the Basic Rent on 25 December 2011". Accordingly, the order in which events occur might have no commercial relevance, but can have a significant effect on the legal consequences. Although Lord Neuberger's comments will carry substantial weight, the issue was not argued before the Court, and he did not make a final decision on the point.
When will a contractual term be implied?
The Supreme Court discussed in detail the existing case law surrounding the implication of contractual terms, and decided that it represented a clear, consistent and principled approach. A term will only be implied if it satisfies the test of business necessity or is so obvious that it goes without saying. There was continuation of a theme we have seen in other recent Supreme Court cases: where the parties have spent time negotiating a "detailed commercial contract", the Courts are more likely to steer away from implying additional terms.
- Landlords and tenants will take away from this that if they wish to achieve a different result in relation to break clauses they will need to expressly draft for it in their leases.
- There may have been claims from tenants waiting in the wings for today's judgment which will no longer proceed.
- Tenants will be closely analysing break clauses and, where breaks have become (or can be made) unconditional prior to the quarter day preceding the break date, tenants may choose to take advantage of Lord Neuberger's strong suggestion that it is necessary only to pay a proportionate part of the rent. Fact-specific advice will need to be taken because the consequences of getting this wrong could mean a failure to break - we await further judicial clarity on this point.
We will continue to see a move away from break dates occurring on a quarter day, to the preceding day instead, meaning that a full quarter's rent is not due on the break date.