Richard Evans and Liam Bell review two noteworthy judgments in commercial landlord and tenant law

Recent weeks have seen two important decisions handed down in cases concerning commercial (and, in particular, retail) property. One relates to the developing relationship between user clauses and the Competition Act, and the other to the very common issue of refunds of rent claimed by a tenant when exercising a break clause.

Is Your User Clause Anti-Competitive?

Since April 2011, leases and other types of land agreement have been subject to the terms of the Competition Act 1998 (“the Act”), which prohibits the prevention, restriction or distortion of competition within the United Kingdom. In what is the first major case on the subject, the Central London County Court has ruled that a proposed restrictive user clause in a retail lease breached this prohibition, and did not meet the statutory criteria for exemption.

Background

The tenant, Martin Retail Group (“MRG”), operated a newsagent’s as part of a retail parade of 11 shops in Crawley, East Sussex. Its landlord, Crawley Borough Council (“the Council”) had established a letting scheme for the parade, whereby each lease restricted the user of the corresponding premises to a different type of trade. One of these shops was run as a grocery store.

On renewal of its lease, MRG requested a wider user clause that would enable it to sell groceries and convenience goods. This was rejected by the Council on the grounds of its letting scheme for the parade, and MRG argued that this was in contravention of the prohibition in the Act. The dispute was referred to the County Court for determination.

Judgment

The Court decided that maintaining the narrow user clause in MRG’s lease would indeed restrict competition at the parade so as to breach the provisions of the Act (this point was, in fact, conceded by the Council early in the proceedings). A key aspect of this decision appears to be that, when assessing the anti-competitive aspects of the lease, the Court constructed an extremely narrow market limited to convenience stores within a short walking distance of the parade (of which there were none). This effectively meant that the Council’s letting scheme conferred a monopoly in the sale of groceries on the existing convenience store.

The Act does permit otherwise anti-competitive agreements to be exempt from the general prohibition in certain limited circumstances (the details of which are beyond the scope of this note). The Council sought to establish one or more of these exemptions, but failed on account of its largely subjective, and potentially biased, evidence to the Court.

Comment

It is worth noting that the Office of Fair Trading has published detailed guidance on the application of the Act to Land Agreements, and that this guidance explicitly states that, “In most cases, permitted user and restricted user clauses are unlikely to restrict competition.” The OFT’s guidance does, however, go on to say that an agreement may be more likely to fall foul of the Act’s prohibition if it is reciprocal in nature, i.e. where the tenant accepts a restrictive user on the basis that the landlord will not allow any other tenant in that parade, park or centre to sell the same type of product.

It is interesting in the MRG case that no such reciprocal agreement was in place; the Council’s scheme was its own policy, with no reference being made to the individual tenants. Nor was the Council active in the market itself (another scenario in which, according to the guidance, landlords should exercise caution when restricting the use of its tenants’ land). Therefore, the suggestion arising from the MRG judgment appears to be that, in very narrow markets, landlords may find their leases breaching the Act’s prohibition in situations not envisaged by the OFT’s guidance.

Rent Refunds on Exercise of a Break Notice – As You Were

In the much-anticipated judgment in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another, the Court of Appeal has determined that, unless a lease specifically provides for it, a tenant will not be entitled to a refund of rent paid in advance for the period after a break date.

Background

The tenant, Marks and Spencer (“M&S”), had a lease containing a break clause allowing M&S to determine the lease on 24 January 2012. As is common, the lease provided for rent to be paid by equal quarterly instalments in advance on the usual quarter days. The break clause required M&S to give six months’ notice to the landlord, and was conditional upon there being no arrears of rent as at the break date, and payment by M&S of a premium equivalent to a year’s rent on or before the break date. Importantly, the lease did not contain wording entitling M&S to a refund of rent paid in advance for the post-break period.

M&S duly served the required notice and, in December 2011, the landlord invoiced for rent (and other miscellaneous sums due under the lease) for the period from the December quarter day to the break date. However, to ensure that there could be no argument about the validity of its break, M&S paid the rent for the entire quarter, i.e. including a period after the break date. M&S then paid the required premium, and the lease came to an end on 24 January 2012. The following month, M&S asked for a refund of the rent paid for the post-break period, but the landlord refused on the basis that nothing in the lease provided for such a refund.

Initially, the High Court agreed with M&S and ordered a refund to be paid. The landlord, BNP Paribas, subsequently appealed to the Court of Appeal.

Judgment

On appeal, the first instance decision was overturned and the Court ruled that no reasonable construction of the lease could result in a term being implied so as to entitle M&S to a refund. Had the parties intended to depart from the usual position at law (i.e. that any loss resulting from an event, or non-event, in a contract should rest where it falls), they would have expressly provided for it in the lease.

The Court did, however, endorse the view that M&S was entitled to repayment of any advance service charge it had paid and which had not been spent by the landlord prior to the break date.

Comment

The first instance decision had caused much consternation amongst commercial landlords. Although the original decision was based in no small part on the hefty premium paid by M&S when exercising its break, many feared that this may have heralded a new age of tenants being automatically entitled to refunds of pre-paid rent when breaking their leases – and potentially on forfeiture, too.

Fortunately, the Court of Appeal decision has restored a degree of common sense to the issue, and allows parties the certainty of being able to rely on the express provisions of their lease. If a tenant’s negotiating position permits, it should ensure that the terms of its break clause provide for a full refund of rent paid in advance for any post-break period, particularly where it must pay the full quarter’s rent as a condition of exercising the break.