As the next quarterly rental payment fast approaches, some companies – particularly in the retail sector where sales in the run up to Christmas haven’t been what they’d hoped – may be considering exiting an onerous, costly lease. That will involve reviewing the break clauses in the lease and weighing up the costs of exercising the break option. But proceed with caution, as the recent case of Marks & Spencer Plc v BNP Paribas Securities Services Trust Company (Jersey) Limitedhighlights the fact that exercising an option to break a lease can, in fact, turn out to be an expensive “cost-saving” exercise.
This case focused on the question of how rent should be apportioned when a break clause is exercised part-way through a quarter. The lease that governed M&S’ occupation did not include an express term allowing it to obtain a partial refund for rent, insurance and car parking fees it had paid in advance which related to a period after the break date when M&S was no longer in occupation. The court ruled that it was not appropriate to imply a term into the lease to that effect. In its judgment, the Supreme Court also gave some helpful guidance generally on issues concerning contractual interpretation.
M&S occupied premises in Paddington, for which they paid a basic annual rent of £1,236,689 plus VAT. Under the terms of the lease, the rent was payable quarterly in advance on the usual quarter days. The lease included a break clause which entitled M&S to give six months’ prior written notice, to take effect to determine the lease on 24 January 2012. One of the conditions of the break was that it would only be operative if, on the break date, there were no arrears of basic rent. M&S also had to pay an eye-watering break premium of £919,800 plus VAT.
M&S paid the rent that fell due on 24 December 2011 but claimed a refund of the rent attributable to the period from 24 January 2012 to 24 March 2012 on the basis that a term to this effect should be implied into its lease.
Following careful consideration of case law on the interpretation of contractual provisions, the Supreme Court found in favour of the landlord, dismissing M&S’ appeal from the Court of Appeal decision. The Supreme Court held that it could not imply a term into the lease to allow M&S to recover a proportionate refund of rent it had paid for the remainder of the December quarter when it was not in occupation of the premises.
The court reaffirmed the principle that it could only imply a term into a contract if it was “necessary in the business sense to give efficacy to the contract.” One of the considerations that should be taken into account by courts when asked to consider implying a term into a contract should also be whether, without the implication of that term, the contract would lack commercial or practical coherence. Courts should not imply terms into contracts in circumstances where they would lie uneasily with the express terms of that contract.
It was noted that the lease was a very full and carefully considered contract. It included express obligations of the same nature as the proposed implied term (that is, financial liabilities in connection with M&S’ right to break). An implied term requiring a refund of advance payments made in respect of the period after the break date would lie uneasily with those express provisions.
Here, the parties were well-advised and could have expressly addressed any apportionment in the lease, if they had wished to do so. Although the implication of a term concerning apportionment of the December quarter’s rent might seem reasonable and equitable, it was not necessary to imply that term to make the contract commercially workable.
Landlords everywhere will be breathing a sigh of relief following this judgment, safe in the knowledge that the terms that their tenants have signed up to are the terms they can rely on. Tenants and/or their lawyers may not be quite so relieved.
If a lease is to terminate part way through a quarter, whether by operation of a break clause or by effluxion of time, tenants in financial difficulty should not assume that a proportionate refund will be forthcoming if there is no express term in the lease to provide for this. The case is a stark reminder which applies beyond landlord and tenant situations that if you want to rely on a right or remedy, express reference for it should be made in the commercial contract under negotiation. Whilst hindsight is obviously a wonderful thing, parties should be careful to consider all eventual scenarios, outcomes and consequences of the terms they are agreeing to. It is becoming ever clearer that the courts will strictly apply the express terms of a contract wherever they can.