An examination of the recent break clause case on repayment of overpaid rent

It is fair to say that the landlord has held the upper hand in cases involving the interpretation of conditional break clauses. The case however of Marks and Spencer Plc v BNP Paribas Securities Service Trust Company (Jersey) Limited in 2013 may provide some welcome relief for tenants.

Marks & Spencer (“M&S”) had a right to break a lease mid-way through a quarter conditional upon payment to the landlord of 12 months’ rent and not being in arrears with other payments. On the quarter day preceding the break date, M&S paid the rent for the full quarter and also paid the year’s rent penalty before the break date. There was no argument that the lease had been terminated but when M&S asked the landlord for a refund of the (overpaid) rent from the break date up to the end of the quarter, the landlord refused which led to court proceedings.

M&S argued for recovery of the overpayments on three grounds:

  • First, that rent was recoverable because of express terms in the lease which provided that the rent was payable “proportionally for any part of a year” but the judge, consistent with established case law, rejected this argument on the basis that it was not certain as at the beginning of the quarter that the term of the lease would end on the break date as the break clause was conditional upon payment of the rent penalty by the tenant and so a full quarter’s rent was due, meaning the judge only then had to consider whether there was any express provision allowing recovery which there was not.
  • Secondly, M&S argued for recovery on the basis of an implied term. The judge held that, following his reasoning in the express term argument, it followed therefore that a reasonable person reading the lease would expect that, in a case where the break clause is actually operated on the break date, the rent would be payable from the beginning of the quarter to the break date but not for any period after such date. Furthermore, the judge deemed it relevant that there was an express pre-condition to the break clause of payment of 12 months rent clearly compensating the landlord on exercise of the break and as such there could not have been any intention that the landlord should benefit from rent post the break date. M&S therefore won on this point.
  • The third ground argued by M&S, of restitution on the grounds of total failure of consideration, was not therefore determined.

The decision in this case appears to be a departure from previous judgments on the point, but the judge distinguished this case on the basis that an implied term had never previously been argued.

So where does this case leave tenants with break rights where the break date does not fall on a quarter day and where there are no express provisions for repayment? Where there are no pre-conditions to break (other than service of notice before the quarter date preceding the break date), then the tenant is probably safe to apportion the rent from the quarter date to the break date on the grounds that there is certainty on such quarter date that the lease will end on the break date. Where a condition to break includes payment of a rent penalty then a full quarter’s rent should be paid on the quarter date but, following this case, repayment will be possible. Where there are other pre-conditions to break (other than payment of rent penalty), then a full quarter’s rent should be paid on the quarter date and repayment of rent is likely to be possible.

We would still advise tenants faced with this situation to pay the full quarter’s rent but the chances of recovery of the repayment after the break date have been greatly enhanced by this case.