Marks and Spencer has recovered rent and other charges paid for a period after a break

Out-Law News | 21 May 2013 | 9:13 am | 3 min. read

Marks and Spencer (M&S) is entitled to reclaim approximately £1.1 million of rent and other charges overpaid in respect of its tenancy of its former head office covering the period after it exercised its break clause, the High Court has ruled.

In his judgment Mr Justice Morgan said that, although the retailer's leases with former landlord BNP Paribas did not expressly provide that overpaid rent and other charges should be repaid, such a term should be implied since a reasonable person would infer such a term from the lease.

M&S held four separate underleases covering four floors of an office building in Paddington which it used as overflow space for its head office. The leases, which the judge said that he would treat as one lease for the purpose of his ruling, were due to expire in February 2018. M&S took advantage of a conditional break clause to bring the lease to an end on 24 January 2012. However this date fell in the middle of the quarterly rent period, and it had paid rent and other charges in relation to the full quarter in advance of the break date.

A break clause is a term in a tenancy agreement that enables a tenant to leave before the tenancy period comes to an end. Generally the lease will specify certain conditions which must be complied with at the break date for the break to take effect. The most common preconditions are full payment of rent, vacant possession and material compliance with covenants.

Under the terms of the lease, M&S paid its annual rent in instalments quarterly in advance, as is commonly the practice for commercial property rents. Similar payments were made in respect of car parking charges, insurance and service charges. M&S took advantage of a break clause that was conditional on there being no arrears of rent at the break date and on payment of an additional sum of £919,800 plus VAT to BNP Paribas.

M&S conceded that BNP Paribas was entitled to receive a full quarter's rent, so that it was up to date with its rental payments on the break date but, having paid the sums due in full for the whole of the quarter, argued that it was due a repayment after the end of the lease covering the proportion of the charges that related to the period after the lease had ended. BNP Paribas argued that there was nothing in the lease to cover this.

Mr Justice Morgan agreed that the lease did not contain an express provision to this effect. However, he went on to imply such a term into the lease on the basis of the usual test for implying terms, namely that a 'reasonable person' reading the lease would expect this to be the case.

He ruled that, on normal expiry during the middle of a rental period, rent is only payable up to the expiry date. If, at 25 December, it was clear that the lease would end on the break date, only rent to the break date would be payable. It was also relevant that the lease referred to the rent being payable in "equal quarterly instalments" and the break clause could only be effectively operated where the tenant paid the landlord a sum equivalent to one year's rent.

The judge said that this showed "that the parties applied their minds to the compensation which the lessor should receive for the fact that after the break date the lessor would have vacant possession rather than an income stream under a continuing lease. That fact makes it unlikely that the parties would have intended that, in addition, the lessor would be entitled to retain the full amount of the quarter's rent paid on the quarter day before the break date," he said.

Mr Justice Morgan ruled that the same principle could be applied to car parking fees and to the cost of insurance and welcomed the landlord's concession that it should also be applied to the service charge, when the final amount of any service charge credit was known. However, he rejected an alternative argument for repayment based on a total failure of consideration and a right to restitution of overpaid sums.

Break clauses are commonly contested by landlords and tenants. Property law expert Siobhan Cross of Pinsent Masons, the law firm behind Out-Law.com, said that this ruling  suggests that a tenant with a mid-quarter break need not necessarily pay sums to cover the full quarter.

"This would be a departure from recent cases and will only be the case where it is clear, at the relevant rent payment date, that the lease will terminate on the break date," said Cross. " Given the myriad of things that can go wrong where the tenant must comply with pre-conditions in order to terminate the lease, it would be a brave tenant who took this risk."

If tenants decide not to take this risk and to pay all sums due for the full quarter,   Cross said that, if their leases are in materially the same form as this lease, then this case suggests that they can be confident that they can reclaim them.

"However, it is not clear from this judgment whether the break penalty payment was an essential part of the decision to imply a term about repayment to the tenant. Consequently, landlords and tenants will need to consider all of the terms of the lease, including terms that may be implied into it. The decision gives tenants some hope they can recover payments, but introduces considerable uncertainty for both parties in this already difficult area."

BNP Paribas may appeal against the decision, according to press reports.