Breaking Bad – Tenants Beware!

The recent decision by the Supreme Court in Marks and Spencers plc v BNP Paribus Securities Services Trust Company (Jersey) Ltd and another [2014] has provided clarity on whether a tenant is entitled to a refund of monies if a break date in a lease is between rent payment dates.

Facts of the case

M&S was the tenant of a property in London and had the option to determine the lease on 24 January 2012.  However, this option was conditional on:

  1. The Tenant giving six months’ written notice;
  2. There being no arrears of rent (or VAT on the rent) on 24 January 2012; and
  3. The tenant paying a break premium of £919,800 plus VAT on or before 24 January 2012 (being the equivalent of a year’s rent).

More than six months before the break date, the tenant served notice on the landlord of their intention to determine the lease.  In response, the landlord invoiced the tenant in December 2011 for the rent, service charge and car parking licence fee due on 25 December 2011 which was apportioned to 24 January 2012 (the intended break date).  The tenant in fact paid the amount required for the full quarter and paid the required break premium on 18 January 2012.

The tenant later started proceedings to recover all sums it had paid for the period after the determination of the lease which the landlord refused to refund.

Points of Claim 

The tenant argued how there was an implied term in the lease requiring a refund of sums paid in advance for the period after the break as the lease provided that the rent be ‘paid yearly and proportionately for any part of a year by equal quarterly instalments in advance’.

They also argued that they did not pay the break premium before 25 December 2011 because, at that date, the parties did not know whether the lease would end before 25 March 2012 and therefore had to pay the full quarter rent. However, if they had paid the break premium before 25 December 2011, it would have been clear on that date that the lease would end on 24 January 2012 and therefore they would only pay an appropriate proportion of the rent on 25 December 2011.  Therefore, commercial sense should be applied to put the tenant in the same financial position it would have been in whether they paid the premium before or after 25 December 2011. 

The landlord countered by arguing that the lease was a detailed document which was entered into between two experienced parties and negotiated and drafted by expert solicitors. Therefore, there was no room for implying terms into the lease.

First Instance 

It was held that the tenant was correct to pay the full rent due on 25 December 2011 as the break conditions had not been satisfied on that date so it was not clear that the lease would determine on 24 January 2012.

It was also held that a refund of the overpayment of rent should be implied into the lease.

Court of Appeal 

The Court of Appeal upheld that the full quarter’s rent should have been paid on 25 December 2011 but disagreed that a term requiring the repayment of the overpaid amount should be implied into the lease. The tenant appealed to the Supreme Court for the refund .

Supreme Court 

It was held here that the landlord did not have to refund to the tenant any monies that were overpaid by them.

Lord Neuberger gave the leading judgment stating that ‘the notion that a term will be implied if a reasonable reader of the contract, knowing all its provisions and the surrounding circumstances, would understand it to be implied is quite acceptable, provided that (i) the reasonable reader is treated as reading the contract at the time it was made and (ii) he would consider the term to be so obvious as to go without saying or to be necessary for business efficacy’. Therefore, a term should not be implied into a commercial contract because it would be fair to do so or that the parties would have agreed to the point if it were brought up during negotiations.

Furthermore, the words ‘proportionately for any part of a year’ did not support the tenant’s claim for an implied term.  In fact, the lease expressly provided that part of a quarter’s rent was only to be paid in certain circumstances which undermined the tenant’s argument of implying a refund clause into the lease.

Lord Neuberger went on to clarify  that ‘[I]n most, possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until one has decided what the parties have expressly agreed, it is difficult to see how one can set about deciding whether a term should be implied and if so what term’.

The Supreme Court also upheld the decision in Ellis v Rowbotham that section 2 of Apportionments Act 1870 only applied to rent paid in arrears, not in advance. The section provides that ‘[A]ll rents, annuities, dividends, and other periodical payments in the nature of income (whether reserved or made payable under an instrument in writing or otherwise) shall, like interest on money lent, be considered as accruing from day to day, and shall be apportionable in respect of time accordingly’ and the Law Lords saw fit that Ellis v Rowbotham should remain good law.

Conclusion 

This judgment can be seen to be a wake-up call to solicitors acting on behalf of tenants to make specific provisions in a lease for a reimbursement of rent following the exercise of a break clause. It also confirmed that a landlord does not have to refund overpaid monies by the tenant for time after the break date.

Harry Rudolf – Trainee Solicitor

 

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Jury O'Shea