Marks and Spencer PLC v BNP Paribas Securities Services Trust Company (Jersey) Limited [2014] EWCA Civ 603

In a highly anticipated decision, the Court of Appeal has just reversed the law dealing with the apportionment of rent and other sums relating to a period after a break date.

When the case originally came before the High Court last year, the judge held that the tenant was entitled to a refund for the period after the break date. The Court of Appeal has overturned this, confirming that tenants breaking leases partway through a rent period are not entitled to a refund unless the lease contains express wording.

The facts

Marks and Spencer plc ("M&S") had four leases containing break options allowing M&S to terminate them on 24 January 2012 or 24 January 2016.

Each break option required the Tenant to meet two pre-conditions:

  1. There must be no arrears of basic rent or VAT on basic rent; and
  2. The tenant must have paid a break penalty of £919,800 plus VAT

M&S served notice to determine the leases on 24 January 2012. On 8 December 2011, the landlord sent out the December quarter’s rent demand. Although this invoice was apportioned to 24 January 2012, M&S took a cautious approach, and paid the quarter’s rent in full, together with the break penalty. This was to ensure that there were no arrears to prevent compliance with the first pre-condition.

It was accepted by both parties that the leases ended on 24 January 2012. However, once the leases had expired, M&S sought a refund for sums paid for the period after the break date, ie 25 January to 24 March 2012. This was approximately £1,100,000. The landlord refused on the basis that the full quarter’s rent was payable and there was nothing in the leases to entitle M&S to a refund.

The High Court Decision

The High Court found in favour of M&S and held that a term should be implied into the leases to allow M&S to recover the overpayments. This was on the basis that such a term was necessary to give business efficacy to the leases. In other words, the reasonable person would find it necessary to imply the clause into the wording, because the leases would not make sense without it.

The Court also said that the payment of the break penalty was compensation for the landlord, which made it unlikely that there had been any intention that the landlord would also be entitled to keep the full quarter's rent.

For full details on the first case, please click here

Consequently, the Court found that M&S was entitled to a refund of the overpaid basic rent, car parking fees and insurance rent.

The Court of Appeal Decision

On 14 May 2014, the Court of Appeal overturned the High Court decision and found in favour of the landlord. The Court of Appeal considered the wording of the leases as a whole, and in the context of the relevant circumstances. It drew the conclusion that there was no implied term in the leases that required reimbursement.

The judgment focuses on implied terms, and in particular when such a term should be implied into an agreement. This requires what the Court of Appeal called "a high level of loyalty to the parties' agreement, read against the admissible background".

The practical implication is that the Court has to consider the document as a whole, together with evidence of the parties’ aims in entering into the agreement. If any party wishes to claim that there is an implied term, that party must show that the term would be part of the agreement. It is not sufficient simply to show that it could be part of the agreement.

The Court of Appeal said that a term should only be implied where it is necessary to do so in order to achieve the objectives of the parties. In this case, no implied terms were necessary. First, it was open to the parties at the time of drafting the leases to include express wording requiring the landlord to repay any sums relating to the period after the break date. Secondly, the possibility that the Tenant would have to pay a full quarter's rent to exercise the break options would have been obvious to the parties when they entered into the leases.

The decision is bad news for tenants with break dates that fall part way through a quarter where there is no express provision for repayment. Those tenants that had been awaiting the decision prior to claiming refunds will be disappointed. However, although the Court of Appeal has refused leave to appeal further, M&S still has the option to seek leave to appeal directly from the Supreme Court.

Our comment

The decision is good news for landlords and disappointing news for tenants, but either way it is useful clarification of a previously grey area. It highlights the importance of negotiating break options properly at the outset, and ensuring that they are documented clearly.

Tips for landlords

Until the time for the Tenant to appeal to the Supreme Court has passed, there is still a possibility that this will be overturned again.

However, for the moment, you should resist any request for a refund for sums paid for periods after the break date. Similarly, if your tenant fails to pay a full quarter’s rent where there is a pre-condition requiring that there be no arrears, this might prevent the tenant from exercising the break option.

If a concession is made to a tenant for repayment of this money, it should be made subject to set-off for any other sums which the landlord can claim from the tenant, for example dilapidations.

Tips for tenants

If possible, negotiate a break option that provides for a refund, or where the break date is at the end of a quarter.

If this has not been done, and you are looking to exercise a break option that has a pre-condition to pay rent, ensure that the full sums are paid so that the break is not invalidated. An overpayment of a part quarter’s rent will still be substantially less than rent to the end of the term. Early legal advice should be sought prior to attempting to exercise a break option.