On 2 December 2015 the Supreme Court comprised of Lord Neuberger, Lord Clarke, Lord Sumption, Lord Carnwarth and Lord Hodge unanimously dismissed M&S’s appeal.
A reminder of how we got here…
In 2006, BNP granted M&S sub-underleases of four different floors in a building known as the Point in Paddington Basin, London W2 from 25 January 2006 to 2 February 2018. Under the Lease, the rent payable comprised a “basic rent” of £919,800 plus VAT which was payable “yearly and proportionately for any part of a year by equal quarterly instalments in advance on the usual quarter days”, and a car park licence fee of £6,000 per annum also payable by equal quarterly instalments in advance.
Clause 8 entitled M&S to determine the Lease on 24 January 2012 by giving BNP six months’ prior written notice (a “break notice”). A break notice would only have effect to determine the Lease on 24 January 2012 if: (i) there were no arrears of rent on that date; and (ii) M&S paid BNP the sum of £919,800 plus VAT.
On 7 July 2011, M&S served a break notice on BNP. Shortly before 25 December 2011, M&S paid BNP the basic rent due on that date for the period from 25 December 2011 up to and including 24 March 2012. On or about 18 January 2012, M&S paid BNP £919,800 plus VAT. As a result of these payments, the break notice was effective and the lease determined on 24 January 2012.
M&S subsequently brought a claim for the return of the apportioned basic rent in respect of the period from 25 January to 24 March 2012, contending that there should be implied into the Lease a term that, if the tenant exercised the right to determine the Lease on 24 January 2012, it should be entitled to a refund from the landlord of the proportion of the basic rent paid in respect of the period from the date of determination up to and including 24 March 2012. Similar claims were made by M&S in respect of the car park licence fee, the insurance rent and the service charge. The High Court held that M&S were entitled to reimbursement but the Court of Appeal disagreed and allowed BNP’s appeal. M&S decided to ask the Supreme Court.
The law as it now stands
The Supreme Court unanimously dismissed M&S’s appeal. The Court considered both statute and common law and determined that it was well established that rent, whether payable in arrears or in advance, is not apportionable in time in common law. Further, case law which previously held that Section 2 of the Apportionment Act 1870 (whilst applicable to rent generally), did not apply to rent payable in advance, was considered correct to be good law.
M&S argued that, had it paid the sum of £919,800 plus VAT before 25 December 2011, it would have been apparent that the lease would come to an end before 25 March 2012 and so BNP would only have been due an appropriate portion of the basic rent on 25 December 2011. It was argued that commercial common sense mandated that it should be in the same position whether it paid the £919,800 plus VAT before or after 25 December 2011. This was rejected. Any anomaly in the working of the lease does not establish that the contract is unworkable or that the result is commercially or otherwise absurd.
When looking at the test for the implication of a contractual termt Supreme Court maintained that:
- A term will only be implied if it satisfies the test of business necessity or it is so obvious that it goes without saying. Further, it will be a rare case where only one of those two requirements are met.
- Lord Steyn observed that the implication of a term was “not critically dependent on proof of the actual intention of the parties” when negotiating the contract. He suggested that if one approaches the question by reference to what the parties would have agreed, one is concerned with the hypothetical answer of notional reasonable people in the position of the parties at the time they were contracting. Secondly, a term should not be implied into a commercial contract merely because it appears fair or that one considers that the parties would have agreed its inclusion if it had been suggested to them.
The long awaited conclusion to this case not only clarifies the position for tenants, but is likely to have wide reaching effects on commercial/property contracts as a whole in particular where a party is arguing the need for an implied term. The decision itself may not be considered ‘fair’ has been ratified as legally correct by two top Courts. By way of example, both parties to a lease are fully aware of the requirements upon serving a break notice and so cannot subsequently claim the effect of paying a quarter in advance makes the contract unworkable. Further and maybe more significantly, the position mirrors that on forfeiture, where a landlord would be entitled to the payment of the whole of the rent which fell due on the quarter day preceding the forfeiture (if payable in advance).
This has the logical effect of casting a sizeable distinction between offering vacant possession of a property and the date by which rent is due under the lease.
Both non-contentious property lawyers and litigators giving ostensibly ‘preventative’ advice must take heed.