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Commercial Question

Breaking news for landlords

updated on 08 July 2014

Question

Why was the Court of Appeal's eagerly awaited decision in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another (2014) good news for landlords?

Answer

The decision of the Court of Appeal in Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited and another (2014) has restored the widely accepted view that, in the absence of an express provision, a tenant should not be entitled to a refund of any rent paid that relates to the period after a break date.

This judgment will not be popular with tenants who had been given hope by the High Court's ruling, but will be met with a sigh of relief from landlords. The Court of Appeal's decision is in line with previous judgments on the issue and clears up the waters which were somewhat muddied by the earlier decision of the High Court.

Background

Prior to the High Court’s controversial decision, it was accepted law that, unless the lease expressly states otherwise, the tenant must pay a full quarter's rent up front on the rent payment date before the break date, even though the tenant’s lease will end midway through the following quarter. The rationale for this is that if the break right is subject to conditions that have yet to be satisfied, the parties cannot be certain whether the lease will continue or terminate. In addition, rent payable in advance is not apportionable at common law or under the Apportionment Act 1870.

The facts

Marks and Spencer (M&S) was a tenant of four floors in a building under four leases on the same terms. Under the leases, rent was to be paid yearly and proportionately for any part of a year by equal quarterly instalments in advance on the usual quarter days, which is common lease wording. M&S had a right to break the leases on 24 January 2012 as long as there were no arrears and on payment of a break premium. M&S paid the break premium plus rent up to 24 March 2012 (the end of the quarter) and the breaks were operated. M&S then sought a refund of the payment of around £1.1 million in rent, insurance, service charges and parking charges which related to the period after the break dates. The tenant argued that a term should be implied into the lease that, upon the break taking effect, the rent for the broken period should be returnable. The parties had expressly so provided in relation to service charges.

The High Court: an apparent breakthrough for tenants

In a departure from the previously accepted legal position, the High Court allowed M&S to reclaim the rent paid in advance for the period after the break date, even though there were no repayment provisions under the leases. The High Court implied a term into the leases entitling the tenant to a refund and reached its decision partly on the basis that the landlord had already been compensated by the substantial break premium paid by the tenant as a condition of the break options in the leases.

Tenants were given hope by the High Court’s decision that it might prove to be a turning point in the battle for apportionments when a lease is broken. However, these hopes were subsequently extinguished by the judgment of the Court of Appeal.

The Court of Appeal: a return to the previous position

The Court of Appeal accepted the landlord’s submissions that no such term could be implied into the leases.

The court found that, when considering whether an implied term can be introduced into an agreement, it is necessary to consider the relevant background at the time the lease was entered into, including an understanding of the law at that time, and it is only in the light of this full background that the court must assess whether the lease would be reasonably understood to include the implied term.

In this case, other terms of the leases showed that the parties had considered what would happen post-break date in other contexts, and further the possibility that a tenant could be liable for a full rental period payable immediately before the break date was clear from the lease. Moreover, the parties would have been aware of the underlying case law as part of the admissible background and so the court concluded that, if the parties had intended there to be a term to this effect, they would have made express provision for it.

The repayment of service charge, insurance and parking charges were dealt with separately. In relation to insurance and parking charges, it was held that the break premium did not take into account any insurance charges that the landlord might incur during any void, nor did it include any element for the loss of the car parking fee. As such, there was no basis for implying a term for the repayment of insurance charges or for the repayment of any car parking fees.

The issue of service charge was resolved at an earlier stage of the proceedings. The landlord had accepted that, by implication, M&S were entitled to recoup any service charges which it had paid, but which related to services that had not been provided by the break date.

Practical implications

The decision may seem harsh on tenants, particularly those who have agreed break dates during a rent quarter period, as they will have to pay a substantial sum of rent to validly exercise their break, knowing that they will not see the money again, even if they can only occupy the property for a short period before their break.

The Court of Appeal’s decision has settled the law in this area and has provided clarity to both landlords and tenants, particularly when negotiating their break provisions in their lease. Further, it restores the consistent approach of the court in interpreting lease clauses literally, based on the precise wording of the contract.

The Court of Appeal has refused the tenant permission to appeal, but it remains open to M&S to ask the Supreme Court directly, so there is a possibility that the decision will be reviewed - although this is unlikely.

The practical implications of the Court of Appeal’s decision are as follows:

  • The case highlights the need for tenants to ensure that their leases contain an express provision covering refunds of sums paid in advance. Further, when negotiating the terms of a break clause, tenants’ lawyers should seek to negotiate that the break date is the last day of a rent period so a full quarters rent is not required or, alternatively, as close to the quarter date as possible, so they get the benefit of occupation in return for the rent they have to pay.
  • Current valuation convention is to assume that a tenant will operate a break and to capitalise a certain income stream only up to the break. If future income for an additional part quarter is no longer at risk, depending on the lease wording, then arguably this can be valued. This may have a material impact on a valuation of a property with an imminent break.
  • A purchaser may be able to bid more with the certainty of a part quarter’s income on a short lease investment and a vendor should recognise this when selling.
  • Tenants negotiating heads of terms for leases with break clauses should now explicitly state there will be a repayment clause, as it is not implied. Landlords and their solicitors should consider their policy on break clause wording.
  • It will be important to demand sums defined as rent beyond a mid-quarter break and to check the lease wording and break date carefully. In addition, it is important not to refund any overpayment where it is not properly due.
  • Ending a lease via a break remains more difficult and now even more expensive than via an expiry. Tenants should think about ways to improve their position and consider alternative options, such as short leases with options to extend instead.

Carla Revelo is a second-seat trainee in the real estate department at Irwin Mitchell.