Key points

  • Where rent or other payments fall due before a break date, they will usually be payable in full, although the position will always depend on what the lease says.
  • A tenant who apportions payments in this situation runs the risk of invalidating the operation of the break.
  • However, once the break has been validly operated, the tenant may be entitled to a refund of payments referable to a period after the break date. This will be the case where the lease expressly provides for refunds, or where the lease is silent but such a term can be implied.
  • The High Court has ruled for the first time on a situation where an obligation to refund rent could be implied into the lease. But, each case will depend on its own facts.

Background

Tenants' break rights are often subject to conditions. Strict compliance with those conditions is required in order for the break to operate. This can prove a trap for tenants even in the seemingly innocuous case of a break conditional on the payment of all sums due under the lease up to the break date.

Where the break date falls part way through a quarter, tenants have frequently come unstuck by paying rent only in respect of the period up to the break date itself (rather than for the full quarter in which the break date falls). Previous cases have established that rent payable advance cannot be apportioned under either the common law or the Apportionment Act 1870. So, in the absence of an express right to apportion in the lease, payment of anything less than the full amount will not operate the break. See, for example, our review in January's Property update of the decision in Canonical UK Ltd v TST Millbank LLC.

In the most recent case, the question for the Court was not whether the tenant had successfully operated the break but whether, having done so, the tenant was entitled to a refund of the rent and other payments it had made for the period after the break date.

Marks and Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Limited and another

Brief facts

Marks and Spencer was the tenant of four materially identical leases of offices at The Point building in Paddington. In each case, Marks and Spencer had the right to break the lease on 24 January 2012 by giving a certain period of notice. In each case, the break was conditional on there being no arrears of the basic rent at the break date and payment of a penalty premium on or before that date. Rent under the leases was payable quarterly in advance, in the usual way.

In July 2011, break notices were duly served. Subsequently, all payments were made under the leases, including the full December 2011 quarter's rent and service charge and the penalty payments required to secure termination on the break date, 24 January 2012.

After the leases ended, the tenant requested a refund of sums paid in respect of the period beyond 24 January 2012. The landlords refused to pay, arguing (among other things) there was nothing in the leases that required them to do so.

The Court ruled in favour of the tenant.

Implied term

Following previous case law, the Court rejected the tenant's arguments that the express terms of the leases provided for refunds of rent to be made, or that repayment was due under the general law of restitution. However, the Court found that it was an implied term of the lease that rent paid in respect of the period after the break date would be repaid after the lease had successfully been brought to an end in accordance with the break clause.

The Court was influenced by a number of factors, including the use of the phrase "yearly and proportionately for any part of a year" in the rent clause and that rent was payable in "instalments". The fact that the penalty payment was equal to a year's rent also appeared to weigh quite heavily with the Court. Having agreed this payment as compensation for the landlords being left with vacant premises after the break date, the Court felt it unlikely that the parties would have intended that the landlords would be entitled to keep the full quarter's rent as well.

The decision is likely to raise eyebrows among landlords and tenants alike. It appears to be the first reported case in England and Wales in which such a term has been implied into a lease.

Insurance rent and service charge

The court reached a similar conclusion as for rent in relation to the overpayment of insurance rent. The situation was slightly more complicated on service charge, but it was accepted in principle that any overpayment should be refunded when the relevant credit was ascertained.

Settlement agreement

On the break date, the parties had also entered into a settlement agreement. Under that agreement, the landlords accepted a further sum from the tenant in satisfaction of any claims under the leases. However, this only released the tenant from claims by the landlord. It did not apply the other way round. A differently worded settlement agreement might, however, have prevented the tenant's claim for the refunds.

Things to consider

It is perhaps surprising that this should be the first case in this country to fully consider whether a repayment term should be implied into a lease in these circumstances. However, in many of the previous cases, the question of whether the tenant is due a refund has not actually arisen, because the tenant has failed to break the lease in the first place.

Furthermore, the decision does not mean that tenants will automatically be entitled to a refund of rent in every case. The principles governing when a term can be implied are notoriously difficult to apply and often misunderstood. When interpreting a document, the Court must be satisfied that any implied term will simply express what the parties to that document (with the knowledge of all the relevant background facts), would reasonably have understood it to mean. As a result, the interpretation of one document by a Court can rarely be relied on accurately to predict the correct interpretation of another.

Looking ahead

  • Tenants will no doubt now be inclined to revisit historic breaks to check what payments were made and in respect of what periods, particularly where a penalty payment was made.
  • Landlords who have not voluntarily made such refunds in the past should expect to receive requests for them now. For the reasons outlined above, specific advice should be sought in each case.
  • When exercising conditional breaks, the best advice for tenants will still usually be to make all payments due under the lease in full and seek any refund later
  • In the Marks and Spencer case, the landlords had originally only demanded rent and service charge for the period up to the break date, but the tenant nevertheless paid the full quarter's amount
  • This remains the safest course for tenants to adopt even where the break is conditional only on payment of rent up to the break date and not also, for example, on the tenant making a penalty payment or giving vacant possession
  • Following this case, landlords may be more willing to agree to accept apportioned payments as full payments for break purposes to avoid having to deal with refunds after the lease has come to an end. However, this may well depend on what other conditions are attached to the break and how likely the tenant is to be able to comply.
  • No doubt tenants will continue to negotiate for as few conditions as possible to be attached to break clauses in new leases. They may also seek express apportionment or repayment provisions in those clauses to avoid having to rely on implied terms.
  • Landlords may need to think twice before signing up to one-sided settlement agreements where refunds of rent, service charge or other payments are potentially due. This could lead to more protracted negotiations in settling dilapidations or other claims.
  • The case was heard in the High Court, so it would be open for a differently constituted court, or a higher court, to reach a different interpretation.
  • It remains to be seen whether the landlords will appeal. We understand that appeals in the earlier PCE Investor and Canonical cases were settled out of court.