Key points

  • Where a lease ended part-way through a quarter by the exercise of a break clause, the court refused to imply a term entitling the tenant to a repayment of the rent it had paid in advance for the period after the break date
  • Would a tenant be entitled to make an apportioned payment of rent on the quarter day prior to the break date if, as at that quarter day, all the conditions to the operation of the break had been met so that the lease would definitely terminate?

Background

In May 2013, we reviewed the High Court decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd

The High Court decided that, if a break date fell part way through a quarter, a term could be implied into the lease entitling the tenant to recover, after the event, a proportionate part of the rent it had paid in advance for the full quarter.  That decision has now been overturned by the Court of Appeal.

Facts of Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd

The break clause was conditional on there being no arrears of rent on the break date and on the tenant by that date having paid to the landlord a sum of money as a "break premium" (equivalent to one year's rent).

Having served notice on the landlord pursuant to the break clause to determine the lease on 24 January 2012, the tenant paid the landlord the rent due for the full December 2011 to March 2012 quarter on or around 25 December 2011. About a week before the break date, the tenant paid the break premium required. The break conditions satisfied, the lease term ended on 24 January 2012.

The tenant then sought repayment of the rent and other sums paid in advance which related to the period after the break date. At first instance the High Court considered that an implied term for repayment should be read into the lease. 

Court of Appeal decision

Reversing the High Court ruling, the Court of Appeal held that no such term could be implied and that the tenant was not entitled to repayment of rent attributable to the post-break period. It thought that the test for an implied term was not met. This was because, read as a whole against the relevant background, the lease would not reasonably be understood to include such a term.

The court's reasons included:

  • At the time the lease was granted, it would have been obvious to the parties that, because rent was paid quarterly in advance, rent might have to be paid for a period beyond the break date. The break clause did provide for other particular consequences of termination on operation of the break. On that basis, it would have been easy for express provision to be made for repayment if this had been intended - but the parties had not done so.
  • The fact the lease reserved rent "proportionately for any part of the year" and included provision for quarterly payments of rent to be made as "instalments" would not have led the parties to believe that there was a right to repayment.
  • The break premium could not necessarily be treated as being the landlord's total agreed compensation for the operation of the break. The landlord could also be compensated in other ways. Until the break premium was actually paid (potentially as late as the break date) the landlord would not know whether the lease would terminate.  The possibility of the landlord retaining part of the quarter's rent (for the post-break period) could therefore be regarded as compensation for that uncertainty. This point is considered further below.
  • The ease with which the suggested implied term could be drafted was of limited weight and indeed could weigh against such implication (see first bullet point above).

In all the circumstances, the inference to be drawn was that the agreed basis on which the parties had proceeded was that "loss from a payment of rent for the broken period should lie where it fell".

Would it have made a difference if the break premium had been paid prior to the last quarter day before the break?

Potentially, yes. The High Court held that, if the break was operated, the rent payable on the last quarter day before the break could be apportioned provided that the tenant had also paid the break premium by that December quarter day. This was because it would then be certain that the lease would terminate on the break date.  The Court of Appeal thought that this "seemed to be correct", but expressly declined to decide the point.

However, the Court of Appeal did not think that this situation, where the break premium was not paid until after the quarter day, was "on all fours" with that scenario.  In this case the landlord remains uncertain about whether the lease will terminate on the break date until the break premium is actually paid.  In many cases this may not be until the break date itself. The court questioned why the parties should not have proceeded on the basis that the landlord was entitled to compensation for that uncertainty, by retaining the part of the quarter's rent that related to the period after the break date?

Things to consider

In the High Court, the tenant had made its claim on a number of different grounds, not just an implied term. These included that, properly interpreted, the lease contained an express term for repayment, and arguments based on failure of consideration and restitution. The tenant failed on all of these arguments in the High Court but succeeded on the implied term. Unfortunately, the tenant did not cross-appeal against the decision of the High Court on all the other arguments. So, having lost on the implied term point in the Court of Appeal, it had nothing to fall back on.

Whether or not a term will be implied into a lease will always turn on the particular circumstances, factual background, and the relevant express terms of the lease in question. However, given that the terms of the break clause in this case are commonly encountered, the Court of Appeal decision does appear to have made it very difficult for a tenant to seek to rely upon an implied right of  repayment in such circumstances.

This is particularly the case given that, in Friends Life Ltd v Siemens Hearing Instruments Ltd (also considered in this month's update), the Court of Appeal stated that "although any question of interpretation depends on the particular instrument, consistency of approach is important and the court should not reach radically different interpretations of break clauses in commercial leases based on slight differences in language which are not obviously intended to achieve different objectives".

Practical tips:

  • Where a lease requires rent to be payable in advance, unless the lease states otherwise (which it rarely will), as a matter of law the tenant is not entitled to apportion final rent payments upon termination of the lease, whether by forfeiture, surrender or the exercise of a break clause.
  • When exercising a break clause in a lease which does not make provision for repayment of post-break rent, it remains the case that, despite the cash-flow difficulty and/or actual financial loss that may be suffered in having paid (even ultimately irrecoverable) monies for a period beyond expiry, the relative sums involved will generally make payment of the full advance rent due a preferable course of action to the alternative of taking the risk of losing the right to determine the lease through non-compliance with break conditions.
  • Where a break is wholly unconditional, tenants may feel that they want to rely on the views expressed by the Court of Appeal in this case to make an apportioned payment of rent on the last quarter day (on the basis that it cannot affect the operation of the break). However, it is important to keep in mind that these views were not a binding part of the decision, and another court may take a different view. There is a risk that the landlord may pursue the tenant post-break for the balance of the rent, and this would need to be taken into consideration.  
  • When agreeing heads of terms for new leases which are to include a break, a tenant should seek to include express provision for repayment of post-break rent. A further protection for the tenant would be – where commercially acceptable - to set the break date(s) to fall on the day before the end of the rent quarter, in order to minimise the potential period of 'lost' rent.