Court of Appeal's reversal of break clause rent decision restores certainty to landlords, says expert

Out-Law News | 15 May 2014 | 10:10 am | 3 min. read

Retailer Marks and Spencer (M&S) must repay over £1 million to the landlord of its former head office after the Court of Appeal ruled that it was not entitled to reclaim rent and other charges covering the period after it exercised a break clause.

Property law expert Stuart McCann of Pinsent Masons, the law firm behind Out-Law.com, said that by "largely restoring" the previously accepted position, the court had provided certainty to both landlords and tenants.

"The High Court's original ruling was something of a surprise departure from the widely accepted view that, in the absence of an express provision, a tenant is not entitled to a refund of rent which relates to a period after a break date," he said.

"By unanimously overturning that decision, the Court of Appeal has largely restored the original position, which will be welcomed by landlords, but will leave tenants without a potentially useful line of argument. However the Court of Appeal did not go so far as to say that a term for repayment of rent for a period after the break date could never be implied," he said.

He added that as the Court of Appeal had refused leave to appeal its judgment, it was "questionable" whether M&S would be able to appeal the case by asking the Supreme Court directly.

A break clause is a term in a tenancy agreement that enables a tenant to leave before the tenancy period comes to an end, provided that certain specified conditions are complied with. In this case, M&S took advantage of a conditional break clause to bring its lease of four floors of an office building in Paddington to an end on 24 January 2012, rather than continuing its tenancy until February 2018. However this date fell in the middle of its quarterly rent period, and it had already paid rent and other charges in relation to the full quarter to its landlord, BNP Paribas, in advance of the break date.

In last year's original High Court judgment, Mr Justice Morgan agreed with M&S that although the leases did not expressly provide that sums relating to the period after the break should be repaid after the break clause was exercised, such a term should be implied since a reasonable person would infer it from the lease. However, Court of Appeal judge Lady Justice Arden said that the lease, when "read as a whole against the relevant background, would not reasonably be understood to include such a term".

Lady Justice Arden said: "[The High Court] held that the apportionment clause [meaning that rent was only payable up to the lease expiry date if this fell in the middle of a quarter] applied not only to the first and final periods of the lease if it ran until expiry, which would not be full quarters, but also, if the break clause was operated, to the advance payment of rent from the last quarter day preceding the break date provided that the break premium had also been paid since it was then certain that the lease would terminate on the break date."

This was not, however, sufficient grounds on which to infer a new term allowing M&S to recover rent, service charges, car parking and insurance relating to the period after the break into the lease, she said.

"The first factor to bear in mind is that it would have been obvious to the parties before they signed up to the lease that there was a possibility that rent would have to be paid on the last quarter day in full for a period which went beyond the break date," she said. "They would therefore have made some provision for this case. Furthermore, they must have had some discussions about what was to happen on termination by operation of the break clause because [other clauses in the lease] deal with two consequences of termination."

"In my judgment, when all the circumstances are considered, the correct inference to draw is that the parties proceeded on the basis that the loss from a payment of rent for the broken period should lie where it fell. Thus no term for repayment is implied," she said.

Property law expert Stuart McCann said that future tenants should "ensure that they do not rely on implications elsewhere in the lease and draft to ensure that a break clause expressly provides for a repayment of rent from the break date to the next quarter day, if this is intended".