Break Clauses

In May 2014 the English Court of Appeal overturned in Marks and Spencer plc –and- BNP Paribas Securities Services Trust Company (Jersey) Limited and Anr (2014) EWCA Civ 603, an earlier High Court decision, ruling that the Lease under review read as a whole against the relevant background, would not reasonably be understood to include a term that entitled the tenant to a refund of rent which was paid in advance in accordance with the express terms of the Lease.

As a consequence the test for an implied term was not satisfied and the inference to be drawn in the prevailing circumstances was that the parties had proceeded on the basis that the loss of a payment of rent for the period after a break date should fall in accordance with the general law be borne by the tenant.

The circumstances were that the tenant had validly exercised a break clause for the lease to terminate on 24 January 2012. There was no express provision entitling the tenant to a refund of rent or other payments for the period after the break date. When the lease came to an end the tenant requested a refund of the rent paid by it on the last quarter date immediately before the break date which covered a period of time beyond the break date together with a refund of service charge.

In the High Court the Judge had been prepared to imply a term into the lease allowing for the excess rent to be returned to the tenant as the tenant had already paid a break premium. This was on the basis that the Judge could not see that it could have been the parties’ intention for the landlord to keep the rent which related to the part of the quarter after the break date as well.

The matter went to appeal and the decision of the Court of Appeal was eagerly awaited and when it came it culminated in a sigh of relief for landlords. This was only temporary as the Supreme Court granted leave to the tenant to appeal to it. The Supreme Court gave leave to appeal the following issue.
Whether it is an implied term of the Lease that a tenant who makes quarterly rent payments in advance is entitled to re-payment, upon termination of the Lease under a break clause, of rents attributable to the period after the break date.

It had been standard practice for landlords to require full payment of a quarter’s rent due in advance when the option to break was a conditional one. At the time rent is paid there is no guarantee that the tenant will meet all the conditions and that the break will be successful.

In such circumstances it could be arguable that the tenant should consider negotiating the inclusion of an express clause to the effect that any rent paid in advance and relating to the period following the expiry of the break notice should be refunded on the successful operation of the break culminating in the termination of the lease. Clearly such a provision would have avoided the need for the long court battle on the issue of implied terms which has now been decided by the Supreme Court and should be adopted by tenants in the post Court of Appeal decision period.

The decision of the Supreme Court Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited (2015) UKSC 72 will leave tenants still having to negotiate such provisions in the future as it unanimously upheld the decision of the Court of Appeal.

The view of the Supreme Court was that, as there is a clear understanding that neither the common law nor statute apportion rent payable in advance on a time basis, it would be wrong, save in a very clear case, to attribute to a landlord and a tenant, particularly where they have entered into a professionally drafted Lease, an intention that the tenant should receive back an apportioned part of rent payable and paid in advance.
The same conclusion applied to a car parking fee and the insurance rent, but not to the service charge as there was a specific provision contemplating repayment of any excess in relation to it.

Tenants and their advisers will now (if they have not already done so in light of the Court of Appeal decision) need to look at drafting amendments to break provisions drafted by a landlord’s solicitors if their client is to have the benefit of a repayment in such circumstances.

Those advisers should also seek to avoid break clauses where the break falls halfway through a rent quarter. If such circumstances cannot be avoided, tenants will need to allow for there being no availability of a re-payment when calculating the cost of exercising a break. Landlords in the same position as BNP can now breathe a final sigh of relief.

What is perhaps more worrying is that there are many tenants who will face a like problem on the basis of a similar type break provision, if and when they exercise a break. While the answer will not be palatable to them it has now been made crystal clear by the Supreme Court that a repayment will not be available to them.

While not perhaps so interesting to landlords and tenants the Supreme Court took the opportunity to clarify the proper approach to take in implying terms into contracts. There is perhaps not such unanimity on this but the judgment emphasises the highly restrictive approach to be taken by courts when asked to imply terms into contracts.

This article has been produced for general information purposes and further advice should be sought from a professional advisor.

If you require any further advice in respect of the content herein please contact a member of our Commercial Real Estate Team.