The Court of Appeal has unanimously allowed an appeal against the High Court’s ruling last year that forced a landlord to repay Marks & Spencer over £1.1 million in overpayments following the successful exercise of a break right.

The decision follows a long line of cases that have penalised tenants for non-compliance with break right conditions and assisted landlords to frustrate attempts to break. Tenants should treat break options as a series of obstacles, teeming with traps at every stage of the process, and accept that as long as replacement tenants are in short supply, landlords will contest any oversight, no matter how small.

TENANT ALERT – EXERCISING A BREAK RIGHT

  • If your break right does not fall at the end of a rent quarter, then in the absence of an express right to make an apportionment, make all payments in full. This includes rent, service charge, insurance rent, and any other sums that are conceivably due under the lease, even if they are disputed.
  • Pay by direct bank transfer, not by cheque (even if payment is usually made by cheque), in case the cheque goes astray.
  • As an added  precaution, undertake a thorough review of your payment history during the lease term, and pay any interest arising on late payments, regardless of whether the landlord has demanded it.[1]
  • Payment of rent is not the only hurdle facing tenants exercising break rights. Do not treat service of the break notice as a straightforward administrative exercise: it rarely is, as case law testifies. Take advice well in advance.

MARKS AND SPENCER PLC V BNP PARIBAS SECURITIES SERVICES TRUST COMPANY (JERSEY) LIMITED AND ANOTHER (2014)

Remind me what it was all about

Tenants struggle with the reasonableness of paying a whole quarter’s rent if this extends beyond the break date. Some cannot resist making an apportionment, despite the absence of an express right to do so, with fatal consequences (as seen in a trilogy of High Court cases between 2011 and 2012)[2], namely an ongoing liability for all the lease covenants for the remainder of the term, which will be far costlier than the overpayments. Tenants whose leases lack an express right to apportion have been advised to pay the full quarter’s rent in advance and save any arguments about overpayments until after the lease has been successfully terminated.

That was the approach adopted by Marks & Spencer when it exercised its right to break its lease of former head office premises at The Point in Paddington.  

High Court

Marks & Spencer complied with the break option to the letter. One of the break right conditions was payment of a premium equating to a year’s rent. Marks & Spencer paid it on the due date, along with the whole quarter’s rent and advance payments of service charge and car parking licence fees. After successfully breaking the lease, it asked the landlord for a refund of the overpayments. It had no express right to one, but the judge was strongly influenced by the existence of the substantial break premium, a clear indication, he felt, that the parties had not intended the landlord to reap an additional windfall.  He implied a term into the lease requiring the landlord to repay Marks & Spencer £1,147,696.

Court of Appeal

Overturning that decision, the Court of Appeal applied the same principles governing the implication of terms into legal documents but reached a different conclusion on the facts. It found insufficient evidence in the lease to support the High Court’s finding that the parties had intended the tenant to recover overpayments, and it did not identify any other relevant background facts pointing in that direction. In its view, the landlord and tenant had intended the loss for the period post-break to lie where it fell, ie with Marks & Spencer.

That was not to say that such a term could never be implied into a lease but if a document does not make express provision for something to happen, the usual inference is that the parties did not intend it to happen.

NEGOTIATING BREAK RIGHTS - TENANTS

  • Seek an express right to apportion rent in the final quarter before the break date.  
  • If the landlord refuses, insist on an express right to recover overpayments once the lease has ended.
  • Ensure that the break date falls at the end of a completed rent quarter (but you will still need an express right to recover overpayments of service charge, insurance rent, and similar payments, as these do not generally coincide with quarter days).

NEGOTIATING BREAK RIGHTS - LANDLORDS

  • Resist tenants’ demands to apportion rent for the final quarter. Where there are other break conditions that must be satisfied, you cannot be certain that the lease will determine on the break date, and if it does not, you should not expect to be chasing for the shortfall.
  • It will be harder to resist tenants seeking agreement that you will refund overpayments post-break, if the tenant is paying a break premium.

WHERE NEXT?

The Court of Appeal refused Marks & Spencer permission to appeal, but the retailer may ask the Supreme Court directly.